Mercantilism is an economic policy that was commonly practiced in Europe between the 15th and 16th centuries. Mercantilists believed that the worlds’ wealth was static thus prompting nations to accumulate more wealth by imposing strict government regulations to maximize trade. The mercantilists policies include; High tariffs on manufactured goods, giving export subsidies, restriction of domestic consumption, limiting wages, forbidding trade between rival colonies and banning the use of gold and silver as a form of payment.
The mercantilists policies were achieved in various ways. The raw materials available in the country was used in manufacturing because they believed finished goods were of high value. Governments would give incentives to new upcoming industries by exempting them from certain taxes and rules, establishing monopolies for the local industries and providing pensions and rewards to the best manufacturers. To promote the local industries’ products, governments prohibited the importation of products that competed with the locally produced goods. Exports of factors of production such as capital and labor were banned so that skilled workers would be retained. Foreign trade was highly encouraged through exports because it would earn them more gold and silver which they believed would make them wealthier.
Mercantilism policy was associated with some issues. Restrictions on imports from foreign countries and colonies made imports more expensive and unsustainable. Black markets also emerged as a result of these price restrictions. These economic policies were mainly to benefit only one group of people and harm the other, and thus there was no possibility of the economics used to maximize the commonwealth. Mercantilism was the leading cause of colonialism because nations scrambled for colonies where they would get cheap raw materials and labors for their industries thus accumulating more wealth. This led to the suffering of people in the territories as they were subjected to harsh working conditions and high taxes from imports.
Adam Smith in his book, “Wealth of Nations” highly criticized the mercantilists. He argued that the mercantilists gave so much attention to silver and gold and neglected other commodities that were also of great importance. The act of believing that a favorable balance of trade was a show of prosperity was wrong. Their views on capital and interest were also imperfect.
The relationship between the policy and absolute advantage
In his book, Adam Smith stated that countries have different capabilities or specialization in manufacturing of different products. When they specialize in their production, they would have an absolute advantage of the product over other countries.
The mercantilist policies have a negative relationship with the absolute advantage theory because economies concentrated on manufacturing everything including those that they were not good at and restricted imports. This theory advocates the specialization of production of goods which will give an economy an absolute advantage when trading with other nations for products that they are not good at by saving on factors of production. For example, Britain had well-established textile industries while France were superior wine manufacturers. These two countries would benefit from each other when they trade.
The mercantilist policies are still being practiced in today’s world inform of the protectionist system. Countries are coming up with restrictions on imports with the aim of protecting its local industries. For example, the USA tariffs on the imports from China. The Chinese government has adopted manly of the mercantilist policies. For example, it has aggressively stimulated and supported widely Chinese linked industries both local and foreign markets while protecting their markets against imports.
“Mercantilism.” Wikipedia: The Free Encyclopedia. Wikipedia, The Free Encyclopedia, 9/9/2014, Mercantilism- Wikipedia