Mercantilism or free trade China 重商主义与自由贸易，以中国

Student number: 2215657 Course: SPS 5018 Tutor: Craig. Smith.

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Course Title:____the wealth of nation_________________________ Essay/Assignment Title:___Mercantilism or free trade of Adam Smith, which is better for a developing country? — take China in globalization as a case to study 2 2 1 5 6 5 7

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Student number: 2215657 Course: SPS 5018 Tutor: Craig. Smith.

Mercantilism or free trade of Adam Smith, which is better for a developing country? — take China in globalization as a case to study

1. Introduction

Mercantilism has dominated in Europe since 16th to 18th century and its core spirit was for a country’s wealth accumulation. Despite its feature had two different stages and its main thoughts had changed slightly, its purpose was still to accumulate wealth, and it appealed the government to use political means to control the movement of moneyto achieve the wealthy accumulation purpose and make the country richer (Smith 1776).Compare with Free trade which was based on Adam Smith’s argument of division of labour (which leads to specialization, greater efficiency and higher aggregate production). (Free trade 2015).Smith considered that markets should be controlled by an invisible hand, not the government. The intervention of government on business and the free market will cause interferences and of reduce the economic efficiency, eventually make the public pay a higher price (Smith 1776).Similarly, based on some previous studies, most economists thought that free trade could affect economic growth by moving goods, services, capitals and labour (Spanu. 2003), and it is a key to drivea country to prosperity (BIS. and DFID. 2011: 3). OldChinawas rich by running domestic business and farming domestic land instead of trading with neighbor countries (Smith 1776). However, since Qing dynastic (specifically in 1840s) to 1949s, China has been invaded and became a semi-colonial country. After the establishment of the People’s Republic of China (1949s), in 1978s, China began the “Chinese economic reform” which also called “reform and opening up” to develop free trade and participate in international business.In 2010s, China became the second biggest economy in the world. Its development in economy was significant. Look through the modern China history (began at the Opium War) until now, the series of activities (wars on China, China’s reforms and so on) happened in China could all related to Mercantilism and Free trade. This essay will look through and analyze the world history, and China’s modern history and the reforms since 1978s toargue that for China, neither Mercantilism nor free trade should be solely adopted, the better

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Student number: 2215657 Course: SPS 5018 Tutor: Craig. Smith.

way is to combine some of their principles and work together and implement the Managed Trade Policy.

2. Mercantilism 2.1 What is mercantilism

Mercantilism is a guiding doctrine that regimes the people of the early Atlantic World to organize and establish the economy. It was also a national economic policy widely existed in Europe. It considered that the government had rights and responsibilities to regulate the economy (McCUSKER. 1996).For economic participants, mercantilists considered thatthe national interest was paramount, business and labor should be prepared not only toaccept the sacrifices to establish and support that state but alsoto acquiesce in the guidance of the government (ibid).The aim of mercantilism wasto establish the financial foundation of a country,accumulating monetary reserves through positive trade balance, especially manufactured goods. Its feature has slightly changed in different stages but its core spirit was constantly accumulating money for a country (LaHaye. 2008). Mercantilists considered that the wealth are gold and silver, however that is wrong, the real wealth should be industry. Moreover, the ways for a country to attain money are exploring gold and silver mines, and foreign trade surplus. They believe that the latter one is more important than the former one because the number of the gold and silver mine is certain, there will be a dried up day sooner or later even a country has huge deposit of the mines. Despite domestic trading is beneficial to the country and economy, it cannot increase the total amount of the money (gold and silver). Hence domestic trading cannot be a source of wealth.The only way to make foreign gold and silver into the country is maintaining a surplus in foreign trade (LaHaye. 2008 and Smith 1776). In the earlier stage (15th to 16th century), mercantilism was also called bullionism. It insisted that a country should buy lesser while trading with other countries to control the money did not outputs to foreign countries. The government should control the monetary movement through administrative measures to store money as many as possible. In the later stage (17th century), mercantilism allowed the money output to abroad and insisted selling more

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Student number: 2215657 Course: SPS 5018 Tutor: Craig. Smith.

than buying while trading. It considered that a country can attain more money as long as thetotal amount of the purchase of foreign goods less than the sale of its goods currency.To guarantee the trade surplusin the foreign, the late mercantilism asserted protective tariff policy.Due to the late mercantilism was trying to control or regulating the movement of goods, money and workshop handicraft industry development, it also known as the balance of trade theory. (ibid). In conclusion, the purpose of mercantilism is to accumulate wealth and the policies of mercantilism could be generated as following:Forbidding colonies to trade with other nations, monopolizing and controlling the markets, forbidding the export (even as the payment) of gold and silver, subsidies on export and setting trading barriers (LaHaye. 2008 and Smith 1776).

2.1 Disadvantages

Mercantilism has many limitations and bring disasters to the world. First, the definition of wealth which guided by mercantilism was wrong. Mercantilists considered that gold and silver was the wealth. Guided by this doctrine, many countries have made a lot of mistakes. For example, from 1502s to 1660s, Spanish took 18,600 tons of silver and 200 tons of gold. This was a great success of mercantilism, however these gold and silver has not been transferred to real wealth (industry). Because of the misunderstanding of wealth (gold and silver) guided by mercantilism, the Spanish government even swept out a lot of foreigners who engaged in commerce and industry. (CCTV. 2013 andStavrianos. 2006).

Second, guided by mercantilism, to purchase wealth (gold and silver), a lot of countries started and involved wars. Take Britain as an example. Leading by mercantilism, Britain made a lot of money by committing sea pirate to Spanish. After that, Britain won the war with Spanish (1588s) and issued the Navigation Acts in 1651s to against Holland, therefore led to 3 battles of Britain and Holland (Smith. 1776 and Stavrianos. 2006). Moreover, after the Industrial Revolution, Britain became the strongest industrialized country, its productivity increased significantly, hence the

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Student number: 2215657 Course: SPS 5018 Tutor: Craig. Smith.

urgent need for Britain was to find more foreign markets. However, at that time, mercantilism was dominated inmost European countries. To open more market, Britain not only adopted non-tariff policies and negotiated with other countries, but also used military to force other countries to open their market such as the two Opium Wars (Xu. 2013). In conclusion, if a country which dominated by mercantilism wants to sell more than buy, it might cause the contradiction between countries like Britain and Holland.

Third, mercantilism may lead to colonialism. For example, Holland made much money via the Flag of the Dutch East Indies Company. In mid-17th century, it occupied Chinese Taiwan, monopolized Japan’s foreign trade and colonize Indonesia (Stavrianos. 2006). For more examples, Britain colonized Hong Kong, Portugal colonized Macao and so on (Xu. 2013).

2.2 Advantages

Mercantilism was a stage of the world economic development. It has limitations but also some demerits. First, mercantilism was beneficial for the development of free trade. As its doctrine “selling more than buying” which encouraged a country to develop foreign tradeand manufactures to produce and sell more (McCUSKER. 1996).In terms of the mercantilism, tariff barriers were likely to be set.This would leadto retaliatory tariffs of other countries to protect their market. In order to attain favorable trade, countries had to compromise and set up relatively \1776).

Second, historically, mercantilism had pushed the development for emerging business.In1602s, for trading with America, Holland established the Flag of the Dutch East Indies Company and had sent about 50 fleets (more than the total of Spanish and Portugal) in the next 5 years since its establishment. Moreover, because of the trading with America, other business had been stimulated to be established like the mortgage, banking, insurance, financial futures and so onand finally Holland established the

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Student number: 2215657 Course: SPS 5018 Tutor: Craig. Smith.

shipping services could be an adoptable approach for China’s service development. Second, for commercial distribution services, China could expand distribution services in overseas by investing which increasing the added value of exports (Anhui Provincial Department of Commerce 2005).

4.4 Risks of free trade First,

involving

in

free

trade

and

global

economy

make

the

connectionbetweencountries goes more and more closed. For instance, the economy of the world has been shocked by the Great Depression in 1929. In order to increase their competitiveness in the world market and promote the exports, the British government devaluated the sterling (pound) by 30 percent in 1931. Similarly, the US devaluated its dollar too and set a high tariff for import. That led to other countries do the same action so as to against the revenge and protect their own export volume. As a consequence, the purpose which was trying to expand trading to recover the economy was broken (Stavrianos. 2006). However, the Roosevelt New Deal finally saved the world. In trading aspect, the U.S passed the Reciprocal trade actin 1934 and negotiated with other countries in order to lower the tariffs and establish the fair trade to recover the world economy (CCTV. 2013). Once the financial crisis happens again in the future, China could learn from the U.Sto conduct “the government managed free trade”.

Second, the international division of labor between countries may be harmful to some countries. According to absolute advantage theory of Smith (1776) and the Comparative Advantage theory of Ricardo (2009). If two countries are in trading partnership, respectively specialized in producing certain product with an absolute advantage or comparative advantage, giving up other production without the advantage of products may harm to a country’s economy in case that sectors or industries are precisely the lifeblood of the country, it will endanger its national security. If implemented free trade like this, a country's disadvantage industry will be seriously damaged, and even destroy an economic sector and an industry. Moreover, if

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Student number: 2215657 Course: SPS 5018 Tutor: Craig. Smith.

one of the two countries only produce the products which consumescheap domestic resources; and less or not produced of products which consumes scarce and expensive resource wouldset its partner country to unfair trade status. Moreover, it could also lead its partner country to the depletion of a resource, destroy the productivity, deterioration of the environment, and thus seriously affect the sustainable development of the country or even the world as a whole. To avoid this potential danger, China could implement “the government managed economy”, and transferring to service output from manufactory is also a measurement.

5. Conclusion

According to Smith (1776), totally free trade is impossible to be established in Britain (despite Britain did have free trade for decades). Similarly, with Britain, despite free trade does not mean the government to abandon the management and control to its trade, this essay still not suggest China to conduct free trade police solely. This essay considers that one of the spirits of mercantilism: accumulation of wealth is beneficial to a country’s development. Free trade is just a measurement to make more money. To achieve this purpose,as a product of mercantilism: protection on some industry or agriculture could be adopted in a short time for China to deal with and overcome some troubles. However, protectionism will eventually hinder the development of economy, free trade will replace it to becomethe approach to make benefit. Due to that, combining mercantilism and free trade to work together and conduct the Managed Trade Policy (which refers to the countries to implement a series of trade policy which is mainly non-tariff based to manage foreign trade, and in order to achieve a country's foreign trade order, healthy development) (Feng. 2004) is a better way for China.

Words count: 3668

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Student number: 2215657 Course: SPS 5018 Tutor: Craig. Smith.

Reference：

Anhui Provincial Department of Commerce. (2005). Policy recommendations to expand exports of services.

BIS. and DFID. (2011). Economic Openness and Economic Prosperity: Trade and Investment Analytical Papers Topic 2 of 18. From:

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CSIS (center for statistics and international studies). (2016). China Economic reform timeline.

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Student number: 2215657 Course: SPS 5018 Tutor: Craig. Smith.

From:

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Feng, L. (2004). Economic globalization and China's trade policy. Economic Management Publishing House.ISBN: 7801629310

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Roger, P. (1994). Free Trade and Environmental Economics.Agriculture and Human Values, Volume 11, Issue 1. Pp: 48-54.Mcdowell, M., Thom, R., Pastin, I. and Frank, H. R. (2012). Principles of Economics. 3rd Edition. Maidenhead: McGraw Hill Higher Education.

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