mikerana

Creative Head, Consultant Social Networking, Software

International Trade or Mercantilism

merchant shipCall it mercantilism or international trade, the rules of engagement always tilt in the favour of the powerful lobbies.

The world today operates as a global village, where individuals and establishments are connected by communications and travel. This has intriguing implications on the world economy; it no longer is the question of ‘wealth of nations’ but ‘wealth of other nations’. Communications and travels spread out the assets, labor, goods, services as well as the invisible hand that drives the market of demand and supply, of one country to the others. If one considers the international trade as one global system, obviously it can have serious brunt on the ecology of the planet, since controls are now decentralized.

As the humanity advances, countries oscillate between the mode of internal wealth created by local resources and markets, and international wealth realized through international trade. In future, the wellness of a nation or its prosperity would depend on how cleverly its leaders manage their own wealth, and the wealth of other nations. International trade is based on strengths or weakness of resources of nations, is what a novice would believe. The reality is that trading partners take to this battlefield well equipped with the original principles of mercantilism. They have even advanced these principles.

Mercantilism

International trade has grown, not because the world has become a global village. Our middle age history is replete with stories of the merchant of Venice, the Chinese silk travelling westwards or the pirates ruling the sea. Merchant navies were formed to thwart the menace of war and piracy. It intrigues us that mercantilism, an ideology for international trade, was actually framed much before Adam Smith wrote his magnum opus, ‘wealth of nations’.

In simple words, mercantilism implies that a country should export more than it imports. Mercantile believers view the economic system as a set of zero-sum games where the gains of one party become the loss of the other. The terms balance of trade, commercial balance or net exports (NX) refer to the difference between the monetary value of exports and imports in an economy over a certain period. If exports are more than imports, balance of trade is called trade surplus, otherwise trade deficit. In today’s growing scenario of revenue from services trying to overtake the revenue from manufactured goods, it is customary to divide the balance of trade into the domains of goods and services.

Monopolies, unfair trade practices and corruption, as they transcend over the international borders, fall in the domain of international law and policing.

The Basics

The 15th century principles of mercantilism, were

  • That every little bit of a country’s soil be utilized for agriculture, mining or manufacturing
  • That manufacturing within the country must be highly promoted by following the rule such as all raw materials found in a country are used in domestic manufacture. Raw materials alone, and not finished products, can be imported. When imported they should be converted to finished products inside the country. It implies that the local labour and skilled labour should be deployed, as much as possible, and a large working population should be built up.
  • That all imports of foreign goods be discouraged as much as possible, particularly if similar goods are manufactured within the country as well.
  • That where certain imports are indispensable they must first be obtained, in exchange for other domestic goods instead of gold, silver or hard currency, implying barter system. In reverse, exports are to be done against gold, silver or hard currency. Special considerations permit free inward technology transfer.
  • That all export of gold, silver or any long sustaining asset is prohibited
  • All domestic money is to be kept in circulation

The Current Paradigms

For today’s environment the rule of engagement are changed a bit, as follows

  • One of the ways of reducing trade deficit is to open additional markets for operations. This makes it easy to float safely in the international waters of market, due to the emphasis that can be placed on strengths. For example, cheap skilled labor in India cannot be resisted even when the American president tries hard. Or the flooding of products by the Chinese succeeds because the products come in a variety of quality and associated price. Such situation inhibits the importer from barring the products of reasonable quality that come at lower prices.
  • The concept of building staple ports has undergone changes. In the past, the landing ships must off-load the cargo, sell it locally for two or three days, then re-load for moving on. Ports of Shanghai and Singapore are the examples of how large a staple port can be, and how different custom rules could be enforced.
  • Forbidding trade to be carried in foreign ships
  • Giving export subsidies to domestic manufacturers, to promote export
  • Maximizing the use of domestic resources
  • Restricting domestic consumption with non-tariff barriers to trade, so that goods remain available for export

 Question that we have to ask is, can we go against the laws of economics that goods are produced wherever they can be optimally priced, and sold where the best price can be realised. If this rule could be violated or replaced by another, all the shipping that is going on today and all the fuel that is consumed could be reduced for the betterment of the planet. A prudent choice is required for exercising the option of goods being at higher prices when manufactured locally, instead of paying a little bit less when importing.

Question that we have to ask is, can we go against the laws of economics that goods are produced wherever they can be optimally priced, and sold where the best price can be realised. If this rule could be violated or replaced by another, all the shipping that is going on today and all the fuel that is consumed could be reduced for the betterment of the planet. A prudent choice is required for exercising the option of goods being at higher prices when manufactured locally, instead of paying a little bit less when importing.

International Trade

Wealth is now created not from the domestic market or production alone, but from a prudent balance of imports and exports based on skills, technology and other resources. Countries must export all that falls in the domain of their strength, but not shirk from importing something that will invigorate the economy, be it industry or agriculture. If doing this is was as simple as it sounds, why not all countries adopt this position. International trade is governed by the monopolies, dominance, rules and tricks, and no one is naive to allow others to win the race. It is not an even competition. Mercantilism is still at work, but international trade is a decent and civilized way of taking care of the other’s wealth.

International trade is manipulated using the wherewithal of technology, which consumes funds for research and surveys. The way this concept works is amazingly simple. Advanced countries invest resources on research and development to take a lead in front-line technologies and win the race for sophisticated products and streamlined services. They exploit the low cost labor of the developing countries either by deploying them off-site or by allowing immigration through work permits etc. Developing countries respond by aping these products and trends, sometime willingly but more often by coercion.

Consumer products and services that pertain in the domain of living style are taken to new heights of presentation and appeal that can lure the citizens of the developing world. Multi-dimensional marketing campaigns including Hollywood movies, social networks and television serials are used for this purpose. In contrast, the futuristic weapon systems, hi-tech industrial and nuclear equipment or high performance white goods are quarantined under the garb of protection of intellectual rights. The denial of these sophisticated items evokes added interest and creates demands. Goods nearing these specifications manufactured by the developing countries are banned for sale on the pretext of non-existence of appropriate certification.

The balance of trade often discussed in various high profile summits, always appears to be meticulously tilted in the favor of developed countries, and the developing countries can do nothing about it because they are under many obligations. In addition, powerful lobbies in the developed countries work towards lowering of the international prices of resources that are of immense significance, such as oil, diamonds and minerals in their favour. In some cases, they barter to their advantage, and in others, they enforce trading in Dollar currency. In case they fail to administer these manipulations, they advocate and/or execute a change in regime. Sometimes internal politicians are hand in glove with the outsiders. Almost every international conference on international trade is confronted with agitations from adversely affected countries.

In the spirit of honesty, the norms for conducting business with the other countries should be clear about tariffs, trade subsidies, import quotas, voluntary export restraints and above all the restraints of foreign businesses operating in the country. Clever leaders would manage the trade barriers, regulations and incentives in accordance with the country’s strengths, weaknesses, specialization and above all the needs. Prudence demands that leaders should not be influenced by the trading interests of other countries.

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This entry was posted on June 14, 2013 by in Politics and tagged .

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