CHAPTER 3
WEALTH AND POWER: THE MERCANTILIST PERSPECTIVE
Overview:
Mercantilism is the oldest and perhaps the most important IPE theoretical perspective from an historical
standpoint. The central focus of mercantilism is the problem of security and the role of the state and the market in
maintaining a nation’s security in all forms. In this chapter, we explore many of the political–philosophical ideas
associated with classical mercantilism, realism, and neomercantilism. The chapter follows a chronology that
covers how and why mercantilist ideas evolved from the sixteenth century to this day. We then discuss a number of
neomercantilist policies related to the debate about how much the state should or should not interfere in markets in
the face of globalization and the recent financial crisis.
We stress five theses in this chapter. First, historically, mercantilism is rooted in the desire for protection by
both the individual and the state. Second, the history of mercantilism demonstrates that states have been and will
always be compelled to regulate markets, and that there are no beneficial effects of markets without the state’s
willingness to allow, sustain, and manage markets. Third, states that pursue economic liberal objectives that include
opening markets and promoting free trade do so when those objectives coincide with state national interests. Fourth,
paradoxically, globalization has not reduced the compulsion of states to protect themselves as economic liberals
suggested it would. Rather, globalization has actually further entrenched national insecurities due to the increased
tensions and conflicts it generates. Finally, mercantilists usually argue that globalization tends to make it difficult for
states to cooperate with one another and with other global actors to solve problems such as the recent financial
crisis.
Learning Objectives:
• To describe and discuss the mercantilist period of history.
• To explain and discuss which philosophies and government policies were and still are usually associated with
mercantilism.
• To examine why mercantilists tend to favor a strong state role in the economy.
• To examine why mercantilists tend to promote industrialization rather than agriculture.
• To explain the distinction between neomercantilism and the classical mercantilism of Hamilton and List.
• To define a “zero-sum” aspects of mercantilism and explain why mercantilists tend to view trade in these
terms.
• To explain and discuss how the economic policies of Japan and the Asian NICs are often associated with
mercantilism or neomercantilism.
• To define “realism” and explain how this popular political philosophy and view of international relations
relates to the mercantilist view of IPE.
Chapter Outline:
INTRODUCTION
a) The recent financial crisis has paved the way for more state involvement in financial markets.
b) Mercantilism is an IPE perspective that accounts for the nation–state’s motivation to accumulate wealth and
power in order to enhance its independence and national security.
c) Realists are concerned with physical threats to the nation-state. Comparatively, mercantilists and neo–
mercantilists are more concerned with the economic threats.
d) There are many forms of mercantilist thought and policy, but their common thread is the desire to
accumulate wealth to gain power for the purpose of national security, whether that security is economic or
military in nature.
e) This chapter covers the ideas and history of mercantilism, neomercantilism, and realism.
f) There are five main theses in this chapter: mercantilism is rooted in the desire for protection, history
demonstrates that states will always be compelled to regulate markets, liberalism is usually perceived to
coincide with state interests, globalization has not reduced protectionism but in fact helped entrench more
insecurities, and lastly, mercantilists expect cooperation to be a major challenge to nation-states and other
actors.
MERCANTILISM AS HISTORY AND PHILOSOPHY
a) Mercantilism also refers to the so-called mercantilist period of European history (roughly the sixteenth
through nineteenth centuries) when the modern idea of the nation-state was born and became the dominant
actor in the international political economy.
b) The economic historian Charles Tilly emphasizes that war was the primary factor that motivated monarchs
and other officials to organize their societies and adopt measures that would help secure the nation.
c) Nation-states emerged in a very uneven fashion over a period of a century, with France, England, Holland,
Spain, and Sweden as some of the first.
d) Ha-Joon Chang explores some of the ways the Tudor monarchs Henry VII and Elizabeth I pursued what
today would be called an industrial policy in support of Britain’s effort to capture control of the woolen
industry in Holland.
e) Full-fledged mercantilism took place sometime following the Thirty Years War, where states were
regarded as sovereign over their people and had centralized governments.
f) Many states competed with one another to generate wealth, which the state used to build up its military
capabilities and defenses.
g) Economic gains by one nation-state were commonly perceived to come at the expense of other nation-states
(as states competed for territory, for example), creating a zero-sum game and thus cementing the divide
between different nations and territories. These situations quite often led to a security dilemma whereby
what one state did to increase its security generated fear in the hearts of that state’s adversaries.
h) Classical mercantilism also coincides with the period of “classical imperialism,” when war, conquest, and
colonialism were frequently practiced by the major powers at the time.
i) While colonialism was used as a tool for the advancement of many nation-states, it also made use of
heavily exploitative and backhanded techniques of domination.
a. Great Britain employed many highly mercantilist-protectionist policies mostly by banning imports on
goods produced domestically and in their colonies.
The Economic Liberal Challenge to Mercantilism
a) In the 1840s and 1870s, economic liberal ideas attributed to Adam Smith and David Ricardo increased in
popularity in Great Britain and gradually replaced mercantilism as the cornerstone of its political-economic
outlook.
b) Specialization in production became an accepted principle based on David Ricardo’s ideas about
comparative advantage and free trade policy.
c) Despite his reputation, Smith was not the doctrinaire defender of free enterprise as most of his followers
presume. He supported taxes on some items and the exclusive use of English ships in trade.
d) Some, such as Karl Polanyi, argued that free trade was also a tool used by some countries to support and
promote domestic industries. Because of its dislocating effects on society, the idea of free trade was
eventually challenged as a democratic countermovement.
e) In the 1870s economic nationalism became entrenched in interstate relations and help generate a second
wave of colonialism in Africa. According to Polanyi this weakened the state system and led to World War I
in 1914.
Meanwhile on the Other Side of the Atlantic: Overlooked Protectionism in U.S. History
a) Alexander Hamilton and Thomas Jefferson carried on a debate about industrial policy and the future of the
U.S. economy that shaped the views and policies of many U.S. officials during the 19th century.
b) Hamilton argued for diversification of the U.S. economy and protection of infant industries as the best
method for achieving economic diversity in employment and national security.
c) In support of Hamilton, the German Friedrich List was a proponent of incubating the domestic production
of goods as the best route to economic development.
d) Both Hamilton and List accused Britain of supporting free trade for purely selfish reasons. The need for
U.S. and European trade protection was very much a political-economic reaction to the free trade policies
of Great Britain.
e) During the nineteenth century the United States implemented high protective tariffs and subsidized
economic growth and westward expansion to put it on a “equal footing” with the British.
f) In the early 1900s, the United States lowered trade tariffs and then subsequently raised them.
g) Many nations followed suite and raised their own tariffs. In reaction, the U.S. Smoot-Hawley Tariff Act
raised the average U.S. tariff rate to 48 percent, reaching a new high. Some blame this for contributing to
the severity of the Great Depression and then World War II.
Keynes, the Great Depression, and the Postwar Order
a) As with the 2007 financial crisis, the Great Depression of 1929 caused many to lose faith and confidence in
capitalism, and led to increasing support for Fascism and Nazism.
b) Keynes argued that states should step in and prime the pump of the national economy to stimulate
employment, deal with the negative social effects of the depression, and restore confidence in the capitalist
system.
c) After World War II, Keynes’s ideas also substantially shaped the design and role of the three Bretton
Woods institutions—the GATT, the IMF, and the World Bank, helping to lower world tariffs, reduce
currency discrimination, and provide recovery assistance.
d) Mercantilists (and their realist cousins) focused on a combination of political–economic objectives that
these same institutions served, such as the containment of communism and maintaining the dollar’s status
as the world’s currency.
e) Most mercantilists and realists would agree that the United States made a political bargain (the visible
hand) with its Atlantic partners (plus Japan and later South Korea) whereby the United States let them be
somewhat protectionist economically if they did what they could to contain communism.
THE ENTRENCHMENT OF NEOMERCANTILISM
a) The Organization of the Petroleum Exporting Countries (OPEC) oil price hikes that occurred during
the 1970s helped push the issue of economic security higher on the policy agenda of most oil-importing
nations.
b) Other factors contributed to the rise of economic security as a political issue. The world power structure
shifted from bipolarity to multipolarity. States became increasingly interdependent as the world shifted
away from Keynesian ideas to more emphasized unfettered markets.
c) In response to the oil crisis and recession, the United States and many of its allies pushed for more
emphasis on free trade and cooperation to open international markets in GATT negotiations and on a
bilateral basis.
d) In the 1970s, neomercantilist techniques became less politically acceptable, but many of their techniques
such as nontariff barriers (NTBs) were not explicitly prohibited by international trade agreements.
e) States used a variety of neomercantilist policies to generate economic growth, control the business cycle,
and eliminate unemployment such as government spending for various programs, regulation of industries,
capital controls, and interest rates changes, and subsidies for research and development, state-owned
corporations, and banking credits.
f) An important example of neomercantilism in the 1970s was the U.S.-led campaign with many of the
industrialized states to decrease their dependence on OPEC countries and enhance their economic security.
Measures included development of a “strategic petroleum reserve” and mpg (miles per gallon)
requirements on vehicles.
g) Other common examples of neomercantilism at the time were the increasing use of nontariff barriers
(NTB), import quotas, and voluntary export agreements.
h) Japan was particularly successful at using neomercantilist policies in the form of export-led growth to
complement its national development strategy.
i) Japan also complemented its protectionist trade measures with strategic foreign direct investment (FDI) and
ownership of homeland businesses and aggressive industries and trade policies.
Neomercantilism and the Globalization Campaign
a) While Reagan and Thatcher focused on market-oriented policies to produce more wealth and chipped away
at the role of the state in the domestic economy, they simultaneously used political and military powers to
advance their countries’ military and economic interests in the international political economy.
b) Robert Gilpin makes a useful distinction between malevolent and benign mercantilism, with malevolent
being more offensive in nature and benign more defensive.
c) President Reagan is famous for redirecting the Nixon–Kissinger multipolar system of the distribution of
power of the 1970s and advancing economic liberal policies in less developed countries (LDCs).
d) President Reagan also mixed economic liberal and mercantilist objectives at the start of the Uruguay Round
of multilateral trade negotiations in 1985, which sought to “level the playing field” by cutting NTBs and
other trade restrictions so that states could compete economically with one another following the same set
of rules and policies.
e) President Reagan often threatened to punish Japan and Brazil for dumping their products on the market or
for using export subsidies. He also threatened NATO allies with trade sanctions if they continued to import
natural gas from the Soviet Union.
f) The United States and Japan repeatedly confronted each other in a series of trade disputes, however the
United States found itself limited in the amount of pressure it could put on its most important ally.
Neomercantilism and the Financial Crisis
a) Since the early 1990s, the neomercantilist and competitive policies of some states raised the stakes for
others that had to grapple with lost jobs and broken families, the loss of electoral support for legislators,
and ultimately the real or imagined loss of national wealth and power.
b) Many neomercantilists go a step further and argue that the financial crisis tended to undermine both laissez-
faire ideals and support for globalization.
c) The crisis has increased tensions between states, uprooted many political and social institutions, and
sparked renewed interest in protectionist and national security-oriented views and policies.
d) The financial crisis has also undermined fueled illegal economies and increase U.S. dependence on China.
e) Many countries use it as an excuse to postpone dealing with environmental problems.
f) Finally, the crisis has undermined the idea that the U.S. economy is a model for the world.
LDC NEOMERCANTILIST POLICIES
a) Like the developed countries, many LDCs have adopted neomercantilist policies in response to
international competition.
b) Robert Wade argues that the “developmental states” of Japan, South Korea, and Taiwan all adopted
industrial policies, encouraged high rates of savings, and supported infant industries to achieve high levels
of economic growth.
c) Brazil, Mexico, and Argentina have done likewise, however, not always with the success of the Asian
nations.
d) Joshua Kurlantzick suggests that a variation of this model is “state capitalism” where the state owns and
directs many enterprises.
e) According to Chang, developing countries have wanted to “catch up” with the rich and more
technologically advanced countries but many have found that if while trying to “climb up the ladder” they
accept the same rules of the game, they may never get to the top.
f) Chang applies the analogy of separating players by age and weight to the issue of support for protectionist
policies in developing nations.
g) It is important to note that early GATT agreements reflected primarily the interests of the developed
nations in trade rules—which included preserving trade protection while only gradually curtailing the use
of import tariffs on industrial products.
h) Developing countries have not benefitted much from the 1994 WTO agreement and have since been
resistant to new trade agreements.
i) Similarly, in the 1990s the poorer developing countries complained that the IMF and World Bank’s
structural adjustment policies (SAPs) and open market policies were a form of malevolent mercantilism.
j) The problem of intentions behind trade and structural adjustment policies tends to generate conflicts in
multilayer trade negotiations such as those in the Doha round.
NEOMERCANTILIST POLICIES TODAY
a) As globalization has wedded all countries to a complex set of broadly economic liberal principles, states
have looked for new forms of benign mercantilist policies where they can still use mercantilist policies like
quotas, tariffs, and plain old arm-twisting.
b) LDCs often point out that today’s advanced industrialized nations used a variety of these policies
throughout their early history, and thus it is somewhat hypocritical of them to try to stop LDCs from using
some of the very same policies today.
Industrial and or Infrastructural Policies
a. States sometime limit land and company ownership rights of foreigners. (See the China vs. Unocalbox).
b) States also commonly require that some inputs for goods be purchased locally.
c) When a state builds roads, power plants, and transportation systems, the benefits of its spending usually
accrue to domestic workers and capitalists who become more efficient and productive as a result.
d) In the United States, investments in public and higher education helped make the United States a powerful
and wealthy nation. Today, countries like China and India are doing the same.
e) Germany, Taiwan, Korea, and Finland are funding applied research institutions that help private companies
discover technologies for major industries.
f) The U.S. government deliberately contracts with strategic industries for many of its external needs such as
defense.
g) Some industries, like media, have been protected in Canada and the European Union for cultural reasons,
not for economic reasons.
Box: China versus Unocal
a) The U.S. framed the bid for Unocal, an American oil company, by a Chinese state-owned firm, as part of a
conscious strategy by China to gain control over U.S. energy resources.
b) China responded that the U.S. was impeding free trade for political reasons.
c) Both China and the United States operated under fundamental mercantilist principles in approaching the
incident, but neither addressed these reasons directly in public discourse.
d) After considerable domestic political pressure, Unocal was sold to Chevron for a lesser bid.
e) Some criticized the logic that the Unocal bid was part of a larger Chinese military supply strategy
antagonistic to the United States, pointing out instead that the industrial growth inciting China’s oil demand
in the first place as China is dependent largely on the United States as a primary importer of Chinese
industrial goods.
Strategic Resources Policies
a) Neomercantilists believe that interdependencies are not always symmetrical (felt equally) between states,
where countries who export goods with inflexible demand (for example, oil), possess more power.
b) Many countries have invested heavily in energy and other strategic resources to protect themselves from
outside shocks or from being cut off from the resource exports of other states.
c) The motivation for these kinds of benign neomercantilism is in large part derived from the legitimate fear
that other countries will use malevolent mercantilist polices to hurt another country.
d) Industrialized democracies today usually try to establish political and military alliances with governments
of big resource–producers such as Saudi Arabia and Morocco despite those countries’ undemocratic
political regimes. They also sometimes engage in stockpiling important goods.
e) Countries like China have encouraged diversification of investments in a variety of resources coming from
a variety of places around the world.
f) Japan has not been successful in diversifying and reducing energy imports; 90 percent of its oil imports are
still coming from the Middle East.
g) Many Artic Council countries are looking to develop resource production in their territory within the Arctic
Circle.
h) Commercial development and national security are increasingly interconnected, generating more tension
between states and businesses.
Box: The Struggle Over Rare Earths
a) The Japanese started a conflict over strategic resources when it seized a Chinese fishing trawler in the East
China Sea in September of 2010.
b) China cut off many rare earth metals Japan uses in iPads, flat-screen TVs, and other products.
c) Global prices for some resources skyrocketed.
d) Japan and the United States scrambled to decrease dependence on Chinese rare earths. Both countries
viewed China’s response as one of malevolent mercantilism and a threat to their national security.
e) Both Japan and the United States began subsidizing research and the production of strategic resources at
home and in other countries. Many private countries also began to increase the production of different rare
earths.
f) The conflict was part of a wider effort to control the South China Seas whose territorial waters contain
large deposits oil and natural gas.
g) The conflict reminds us that many states have big stakes in strategic resources, which can easily lead to
brinksmanship and even military conflict.
CONCLUSION
a) Mercantilism is the oldest and most powerful IPE approach, based on its attention to political and economic
security.
b) Mercantilist ideas have evolved over the years and adapted to changing conditions in the international
political economy.
c) Certainly, mercantilist motives and neomercantilist policies are still responsible for a good deal of
international conflict.
d) With the onset of deep interdependence between states in the 1970s and the globalization campaign of the
1990s, many state officials and academic experts became increasingly aware of the tightening connection
between domestic and foreign policy issues.
e) As long as states exist, they can be expected to give first priority to their own national security and
independence followed by advancing their economic wealth. Today, all states continue to use a variety of
protectionist measures to assist some of their manufacturing, agricultural, and service sectors.
f) List, Hamilton, and other mercantilists view economic liberalism more as a tool that bigger and stronger
states (hegemons) use to promote their own interests. These states support economic liberal ideas and
policies only to the extent they complement their own domestic and foreign policy objectives.
g) Globalization and financial crisis have exposed the inadequacy of the market alone to protect states and
their societies. Markets are often not self-regulating or self-adjusting, and therefore states should not leave
it to markets to make key decisions related to human issues and problems.
Key Terms:
• mercantilism
• classical mercantilism
• realism
• neomercantilism
• industrial policy
• security dilemma
• zero-sum
• comparative advantage
• economic nationalism
• infant industries
• OPEC
• Interdependence
• non-tariff barriers (NTBs)
• import quotas
• malevolent mercantilism
• benign mercantilism
• development state
• structural adjustment policies (SAPs)
• strategic resources
Teaching Tips:
• There are two strong themes interwoven in this chapter and it is a good idea to use them explicitly to help
students organize the large amount of information contained here. The first theme is that mercantilism is three
different things: a theory or philosophy, a period of history, and a set of economic policies. Deal with each of
these three variations of mercantilism explicitly, and then bring them together to show how they are related.
• The second theme is the evolution of mercantilism from a perspective that focused on wealth as a determinant
of wealth and military security to a contemporary view that puts economic security on the forefront of national
concerns. Carefully develop the connection between mercantilism and economic nationalism, and then how
both are connected to neomercantilism—as reflections of change or the transformation of the international
political economy over the past 400 or so years.
• Develop the relationship of mercantilism to realism. How are they similar and different? Also, ask students why
the popularity of realism has lasted longer than mercantilism, or has it?
• There is a lot of historical detail in this chapter. Most of the specifics will be covered again later in the text, but
we include it here as well to provide concrete examples of the evolution of mercantilist ideas and policies. Since
students often know little of modern history, they may need some help with this material. You can be most
helpful if you choose a particular aspect or period of history you are most familiar with (e.g., Japan, the rise of
the NICs, trade, food policy, or the environment, etc.) and briefly take students through the background history
of this problem. If your class has a particular theme or set of issues it addresses, this is a good opportunity to
work in some historical material on the subject and/or to raise a number of conceptual issues and topics.
• An important set of ideas to key in as you work through this chapter is the continued relevance of mercantilist–
realist ideas, especially related to globalization in general, but also specifically to the current global financial
crisis. Many students tend to view the subject of IPE through the lenses of economic liberalism and assume that
there are few, if any, other important perspectives out there.
Sample Essay-Discussion Questions:
1. After reading the chapter, discuss the different ways the term mercantilism has come to be used, both
theoretically and in terms of specific policy problems/issues.
2. Outline some of the many motives for mercantilism and neomercantilism in the international political economy.
Be specific and give examples from the reading.
3. Brief quotations from the writings of Alexander Hamilton and Friedrich List are given in this chapter. Based on
these short bits of writing, compare and contrast the ideas of these two political economists. What do they have
in common that makes them both mercantilists? How do they differ in the policies that they suggest nations
take?
4. Contrast early forms of mercantilism from more recent forms (neomercantilism). What do they have in common
by way of motive? What are policies that states use to protect themselves? How do they differ? Be specific.
Give examples from the reading.
5. When it comes to the financial crises outlined in chapters 1 and 2, identify and discuss some of the most
important protectionist-security elements of that situation.
Sample Examination Questions:
1. All of the below took place following the Thirty Years War when the practice of mercantilism “gained a full
head of steam” EXCEPT:
a. states came to be regarded as sovereign over their people within their territories.
2. Which period of history is often called the “mercantilist period”?
a) the fourteenth century
3. Which political economist stated that “the power of producing is infinitely more important than wealth itself”?
a) David Ricardo
4. An important example of neomercantilism in the 1970s was the United States-led campaign with many
industrialized states to decrease their foreign dependence on _____
d) feed grains
5. Which of the following is NOT a modern industrial or infrastructural mercantilist policy that is commonly
implemented by countries?
a) limits on FDI as a percentage of GDP
6. What was the official reason for the U.S.’ objection to a Chinese company’s takeover of Unocal?
d) Chevron was already in negotiations with Unocal when the Chinese company came into play.
7. Which is the best statement of the relationship between wealth and power according the mercantilist thought?
d) If a nation has a large army, it will be wealthy.
8. Alexander Hamilton and Friedrich List both wrote that a strong state was necessary if a nation intended to
compete with the manufactured goods of the leading industrial power of their day. The dominant industrial
power at the time was
d) Japan.
9. Nations that have at various times used strongly neomercantilist policies to achieve economic growth in the
postwar era are
a) Japan.
10. Neomercantilism differs from economic nationalism in that
a) it makes greater use of tariffs and quotas.
11. All of the following are listed in the chapter as being reasons behind lagging progress on trade negotiations
EXCEPT:
a) previous trade negotiations have mostly benefitted the developed world.
12. Which country do U.S. officials fear is trying to “lock up” the world’s energy supply?
a) France
13. When it comes to protecting Canada’s industries and services, Patricia Goff suggests that _____ is the driving
force behind these policies.
a) consumer sovereignty
14. The expert who asserts that developing nations have a hard time “climbing the ladder” or overcoming
development barriers is
d) Kissinger.
15. Some experts believe that the strategic resource conflict between Japan and China in 2010 is really about
control over resources in _____?
a) the Mediterranean