3. Web of Globalization (2)

In a short essay, discuss the theory of mercantilism, and discuss favorable and unfavorable balances of trade as they apply to international business.

ANSWER

The theory of mercantilism has a basis in ancient Europe in the 1500s where a nation’s wealth and power was thought to increase by increasing exports. As a result, nations would engage in a military conflict as a means to ensure the protection of local markets and supply. Similarly, mercantilism was propelled by the idea that the performance of a nation economically could be assessed by the level of ownership of gold and silver among other precious metals. To support this, the accumulation of these precious metals increases with eh rise in agricultural output, new home construction and a strong merchant fleet to present an added market for goods and source of raw materials.

The idea brought about the British Colonial Mercantilism where countries under the British colony had controlled production and trade which in turn stunted the growth and economic freedom of colonial business. Then there was the expansion of the slave trade where slaves were traded for sugar and molasses in America. Another effect was inflation and taxation where the British colonial government demanded to conduct business using gold and silver. Owing to the nature and poverty of the colonial states, they found themselves lacking in these precious metals and instead wrote each other paper debts which graduated to paper currencies and in the cause of time resulted in heavy inflationary periods.

The idea was eventually run by time although the barriers to trade still exist today in an attempt to protect local industries. For instance, in the event of the termination of the Second World War, the United States adopted a trade policy seeking to protect Japan and introduced voluntary export restrictions with the government in Japan limiting the number of exports to the United States.

References

Chipman, J. S. (1993). A theory of mercantilism. The political economy of global restructuring, 2, 41-76.