Unit 2 Mercantilism

There Are Many

Perspectives on IPE. Why??
 We need a “lens” with which to view events:
--Why are some countries richer than others?
--Is globalization (spread of economic behavior,
technology, and culture across borders) a good
thing?
--How can countries grow or develop?
 Mercantilism
 The oldest perspective.
 Closely related to the political science
perspective of realism.
 Its newer offspring is called
‘neomercantilism’, which is focused on
the interests of the state but (grudgingly)
recognizes a role for global trade and
interdependence.
 What concern is at the heart of
mercantilism?

Why do countries make economic transactions?

To mercantilists, it is when it suits their strategic
interests.
Read the quote by James Fallows on
p. 21…

Is economics a positive-sum game…

…or a zero-sum one?

Are those other guys cooperating with you

because of a spirit of brotherhood?
 Classical Mercantilism
(1400s-1700s)
 Focused on economics as a way to create
security
 Accumulate wealth (gold), and use this
resource to defend yourself (buy weapons, hire
armies, bribe potential attackers)
 Portugal and Spain were the big powers
 They faced massive security threats
 You need to be wealthier than others
 Role of the State in Classical
Mercantilism: Do Whatever it Takes
● Subsidize production (Allow for monopolies
if they will help domestic industry to be
strong)
● Restrict Imports
● Colonize new regions to obtain more raw
materials, cheap labour, and new markets for
your products
Mercantilism was associated
with colonialism…
The Mercantilistic World of
the 18th Century
Mercantilism is based on the reality of a
Realist self-help system
And With Conflict Between Global
Powers Over the New World
 To a mercantilist, the system is:
 Made up of nation-states
 Anarchic: No Order or hierarchy
 Self-help (defend yourself or you’re in big
trouble)
 Based on how much power you have to make
other states do something (relational power)
 The Evolution of Mercantilism,
19th and 20th Centuries
 Gradual acceptance of importance of foreign
trade to economic survival
 Lower importance on “out-trading” (in a
hypercompetitive way) other countries, higher
importance on developing productive capacity
and developing markets for goods
 Development of national domestic economies
in newly emerging nation-states (rather than
acquisition of gold, minerals, territory)
 Economic Nationalists: Hamilton
and List
 Alexander Hamilton vs. Thomas Jefferson:
Industrial vs. Agricultural Future for
America??
 Hamilton believed that the capacity to produce
was the key to economic and political power
 Subsidies and Tariffs are important to help key
domestic industries get started
 Manufacturing is more valuable than
agriculture because it helps you to become
more independent
 Friedrich List (1789-1846)
Expanded on Hamilton’s ideas:
*Strong role of the state in the economy: not
only regulating trade and production, but in
creating technology and skills
* “National Economics” rather than
“Individual Economics”
*National Interest is best advanced by
industrialization
 List on Commerce
“a nation's true wealth is the full and many-sided
development of its productive power, rather
than its current exchange values. For example,
its economic education should be more
important than immediate production of value,
and it might be right that one generation
should sacrifice its gain and enjoyment to
secure the strength and skill of the future.”
 Popularity of List and
Hamilton’s Ideas today
 Japan, Korea, other East Asian economies look
at states as potential competitors
 The focus is not on making yourself richer…it
is making yourself richer than others!
 The role of the state in development of your
economy is crucial
 Ideas not as popular in US, UK, AUS/NZ, who
focus more on “letting the market decide”
 Mercantilism vs. Neomercantilism
 Mercantilism is dead…no state tries to hoard
gold any more
 Today’s world is a result of technological
change…trade flows, financial flows, labor
flows are necessary to growth and survival
 But…you still want to protect your own
country’s interests with state intervention
 Political power and influence are tied to
economic vitality
Fitting Economic Nationalism into a
Liberal Economic Order
 Global Institutions (IMF, WTO, World Bank) are
based on a desire to facilitate free trade and economic
cooperation
 Economic nationalists have to accept this reality
 Overt state control of the economy is gone, but states
still try to protect domestic interests, think
strategically, gain competitive advantages
 Result: “Embedded Liberalism”-a system that allows
trade and capital to flow freely, but states retain some
economic control over themselves
 Economic Nationalist Measures
●Overt Tariffs have often been replaced by NTBs (Non-
Tariff Barriers): Health and Safety Standards,
licensing, labeling requirements
●“Voluntary” Export Restrictions (negotiated quotas)
●Policies to reduce dependence on foreign products

Examples: Japan only allows rice designed for

“Japanese stomachs”, USA tries to restrict marginally
different catfish from their own variety
Economic Nationalist Measures (II)
 Strategic Trade Policy
Asian Countries such as Japan led the way in
coordinating policy in ways that provide
advantages to your domestic industries
Pat Choate’s book Agents of Influence
discusses how Japan destroyed the American
television industry through coordinated
production and trade policies
Japan’s MITI is the most formidable
combination of government and
industry in existence

Choate’s book discusses how it operates…

 Japan’s strategy
 MITI ministry control helps to keep its
markets closed, while helping key industries to
market their products abroad
 Take advantage of more open US markets
 Lobby the US Congress for more favorable
policies
US Economic Nationalists’ Strategy
 Be Wary of Globalization

 Guard key industries

 Avoid “Agents of Influence” (lobbyists)

 Demand Access to Foreign Markets

Do We see any Economic
Nationalism in NZ?
 Robert Gilpin
 A modern-day scholar of neomercantilism who
refutes the idea that nation-states are “old
fashioned” in the current globalized world we
live in
 States Still have a powerful role in the
economy, according to Gilpin
 States must survive three threats
Threat 1: Consumer Well-Being Has
Replaced Geopolitical Interest

Gilpin: States are not concerned only with Absolute

Gains, but Relative Gains
[Insert Russian Joke Here]

Thus, we have entered the era of managed trade (rather

than free trade). States haggle over trade agreements
based on political needs such as employment and
national security.
[Example: Japan must limit the number of cars it ships
to USA.]
 Threat 2: Interdependence Means
States Can’t Make Many Key
Economic Decisions Any More
Gilpin: Most economic activity still occurs within
states,

And…

States have accepted interdependence, but states still

make key decisions…manipulating interest rates,
joining in regional organizations, protecting their own
currencies, and many other actions
 Threat 3: New Actors (Regional
Blocs, MNCs) Are Replacing States
in the Global Economy
East India Tea Company Flag in Pirates of the
Caribbean:

Actual East India Tea Company Flag:

 Are MNCs Replacing States?
Gilpin’s Response:
Most MNCs have home bases in North America,
Western Europe, and Japan
MNCs are still largely “national firms with
foreign operations”
Most R&D and corporate control occurs from
the home country
Regional Blocs are interstate alliances
 James Fallows
 A writer for the Atlantic Monthly
 Trained Economist
 Focuses on Technology Issues
 Critic of the US, fascinated by Japan and the
East Asian approach
Japan-US Relations

 USA historically the Big Brother, Japan the

Little Brother
 Japan was different, but only until it “caught
up” to the big brother
 Japan historically looks up to the USA as a
business model
 As USA began to falter, Japan began to
question the traditional relationship between
the 2 nations
 Fallows’ View of Economics
 The USA and England act as if Economics
works in a certain way—that things can only
operate a certain way
 Economics in the Anglo-American world
focuses on a series of law-like principles of
human behavior
 What does it leave out???????
 Geopolitics
 Geopolitics is the art and practice of using
international political power
 Term was coined by a Swedish political
scientist
 Economics is closely linked to growth of
countries—politically, culturally, and
geographically