SUI 106

Introduction to Political Economy

Week 3
Mercantilism

Prof. Birgül Demirtaş

State, market, society, individuals:

 Which one has the priority?

 Who should take decisions?

 Whose interests should we take into account first?

 Whose security is the most important?

Understanding Mercantilism
 Its relationship with realist theory of IR?

 What is realism? Who are the actors? What are the basic
assumptions of realism? What kind of global order does realism
suppose?
Classical mercantilism: supposes to encourage exports and limit imports so that state
can have trade surplus. It means more income for the state.

They emphasise economic threats to a country.

Neomercantilism: Revived version of mercantilism. More
complicated policies. It supports control of trade by state. States use
different ways to protect themselves against global competition.
 Short History of Mercantilism
 Rise of modern nation-state in Europe during 16th cc. Small
fiefdoms established larger states to be able to protect themselves
better. Before that most people were living in villages under
control of feudal lords.

 The question was how to make the new nation-states secure and
what kind of role the economy should play in this process.

 Creation of nations and formation of states

Kings perceived themselves as the owner of state authority.

Louis XIV: L’État, c’est moi.

France, Great Britain, Holland, Spain and Sweden were established.

Italy and Germany: Late unifications.

Treaty of Westphalia (1648): Mercantilism gained more
importance as states become more centralised and state
sovereignty became the basic norm in IR.
The newly established nation-states wanted to become powerful and be secure. They also wanted to produce wealth.

-economic welfare

-military security
They wanted to encounter external threats.
These new states created bureaucratic institutions.

They started to establish a budget. They started to collect taxes. They started to calculate state income and
spending under the control of the centralised authority.
Characteristics of the state formation process:

 State egoism

 Zero-sum game approach («sıfır toplamlı oyun»)

 Security dilemma («güvenlik ikilemi»)

Land Enclosure Acts in Great Britain (18th and 19th cc):

«enclosure, also spelled Inclosure, the division or consolidation of communal fields, meadows, pastures, and other arable
lands in western Europe into the carefully delineated and individually owned and managed farm plots of modern times»
(https://www.britannica.com/topic/enclosure)
British state wanted to promote textile industry, therefore it made use of tariff rates and gave subsidies to exports.

Britain pursued import-substitution policy (ISI) («ithal ikameci politika»).

It did not permit any woolen imports from abroad.

It wanted to give harm to textile production in Netherlands and Belgium.

Colonial period:
-Exploitation of colonies

-Slavery

-Genocide
Strong state

State protectionism during colonial era

Colonies became the basic source for raw materials.

Colonies also became the source of cheap labor force.

Colonies also became the market for the exports of colonising countries.
State became more important during colonial era.

States promoted exports to colonies.

Competition among European Powers over
colonies
All imperialist states tried to increase their power and wealth.

They used restrictions to ban competitive import from their colonies, e.g. Britain banned import of clothes
from its colony India. In fact, Indian textile was superior to Britain.
Hence, imperialist countries became richer because of
mercantilist policies, i.e. protectionist trade policies.
Rise of liberalism

 19th cc (esp. between 1840-1870): Liberal ideas became popular

in Britain.
Adam Smith, Wealth of Nations (18th cc) – Her argued that mercantilism results in inefficiency of production.
David Ricardo (British businessman and member of Parliament 1772-1823):
Comparative advantage
Comparative advantage: Countries should specialise in
producing certain goods that they can produce more efficiently.
They should buy other goods from other countries.
However, Britain was already the most efficient producer among industrialised countries, only then it began to
support free trade policies.

Britain adopted free trade policy in 1840, however it kept some of the tariffs till 1860.
Even Adam Smith supported the maintenance of some
of tariffs, like tariffs on alcohol, sugar and tobacco.
Karl Polanyi: How states used liberal economic policies to be able to protect their own economies against
others.
After 1870: Increasing importance of mercantilism and economic nationalism.

German unification in 1871 and new competition over colonies. The path to the onset of the I. World War.
US History and Mercantilism

 Alexander Hamilton (First US Secretary of Treasury, 1755-1804):

claimed that US infant industries should be protected by the
state. State should support its own industries.

 German thinker Friedrich List: Importance of production of

industrial goods, developing new technologies and investing in
agriculture
Patriotic economic nationalism in the US

Developing behind high tariffs: US, Germany, Austria, France…

US doubled tariffs in1812 and it kept high
tariff rates till World War II
According to List, free trade should not be pursued
until states can come to the level of «equal footing».
1929 Global Economic Crisis and Post-war Global Order

 1929 financial crisis: Failure of liberal economic order.

 Rise of Keynesianism
Rise of fascism in Europe
Post-WWII Order
Bipolarity

West Block: IMF, World Bank and GATT

Oil Crisis in 1970’s and Neomercantilism

 Organization of Petroleum Exporting Countries

(OPEC): 1973: Quadrupling of oil prices
OPEC: established in 1960
OPEC member countries:

Founding members: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela

Countries joining later: Qatar (1961), Indonesia (1962), Libya (1962), the United Arab Emirates (1967), Algeria (1969), Nigeria
(1971), Ecuador (1973), Gabon (1975), Angola (2007), Equatorial Guinea (2017) and Congo (2018).
Economic security

Energy security
Neomercantilist policies: a set of policies, reducing vulnerability
of states to global competition, however, they generally adopt free
trade.
Examples for neomercantilist policies:

More government spending for development and research, regulation of economy,

controlling capital and interest rates, providing credits from state banks.
US measures to deal with oil crisis:

-supported development of oil fields in Alaska

-promoted to decrease home energy use

-funded development of alternative energy resources

Nontariff barriers:
Like health, safety and environmental standards.
Import quotas
Voluntary Export Agreement (VEA): a negotiation between
exporter and importer according to which exporter voluntarily
accepts importer’s demand to limit imports.
Japanese case:

Ministry of International Trade and Development (MITI)

State-led development process. Government provided subsidies to certain sectors.

Rise of Liberalism: 1980’s and 1990’s

 Ronald Reagan

 Margaret Thatcher
Economic Crisis and Comeback of
Neomercantilism
 2008 crisis
Asian state capitalist model
Case of LG factory in South Korea: They in
fact wanted to establish textile factory…
But the government convinced them to invest
in electric cables
Developed countries and their interests: «Do as
we say, not as we did»
Neomercantilism in Our Contemporary World

 Trade rules determined by developed countries

2 neomercantilist policies:

*industrial & infrastructural policies: Limiting investment in certain sectors

*strategic resources (e.g. oil) policies: States do not want to be dependent on other countries.
Limiting foreign capital in «strategic» fields and sectors
Benign mercantilism

Malevolent mercantilism
Malevolent mercantilism: Punishing rivals
 Summary
 Each state used mercantilist policies in its history

 Still today protectionism even in liberal countries with regard to

certain sectors (e.g. Common Agricultural Policy –CAP- of EU).

«The CAP accounts for 33.1% of the 2021 EU-

27 budget»
https://www.europarl.europa.eu/factsheets/en/sheet/106/financing-of-the-cap#:~:text=The%20CAP%20accounts%20for
%2033.1,above%20%E2%80%93%20column%20(A)%5D. )
Financial crisis shows problems with regard to market
Canada and EU: protecting culture industry
Example of sports competitions:
Creating categories for athletes according to
their age, weight, gender