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The Return of Mercantilism? How India and the World are Rethinking Trade Strategies

Amidst intensifying economic and geopolitical rivalry, policy makers across the globe are turning to neo-mercantilism to increase the wealth and power of their nations. This pattern has been reinforced by the pandemic's disruption to the supply chains, the Russia-Ukraine conflict, Europe's energy crisis, and the long standing tensions between the United States and China, amongst many others; the idea of free trade is being replaced. As Federico Steinberg (2023) puts it, “If history is anything to go by, the dominance of neo-mercantilist ideas could last for quite some time.” But what is this neo-mercantilist idea? To trace the history of this resurged phenomenon, we need to revisit the ideas of mercantilism from the 16th to 18th century. 


Mercantilism, coined by Adam Smith in his Wealth of Nations, was an economic theory and practice. It promoted governmental regulations of a nation’s economy for the purpose of state power at the expense of rival national powers. In other words, it seeks to reduce the current account deficit or achieve a current account surplus by a positive balance of trade. It was based on the principle that the world's wealth was static, and nations had to strategically fight each other to get the largest chunk of it. It also assumed that a nation’s wealth and power were best served by increasing exports. The vision was that the state’s prosperity was directly linked to its military, industrial, financial and technological power, and trade policy was used as a tool to secure these goals. 


To put it simply, the states would jump into the sectors with high export and import potential and change the dynamics of it to maximise their wealth. For instance, if an industry has a lot of import potential, the states would make stringent policies that would hinder the growth of private players and  gradually acquire the industry, i.e., nationalise it. Furthermore, by controlling production costs, like labour, these states aimed to flood foreign markets with cheap exports, dominating trade. However, this system faced criticism from thinkers like Adam Smith, paving the way for free-market ideas.


Neo-Mercantilism


Since the middle of the last century, the industrialised economies advocated for free trade, lifting of restrictions on the flow of capital and goods and a global system to govern the market following which, international organisations like International Monetary Fund, General Agreement on Trade and Tariffs were created in accordance with the other arrangements of post World War II period. After all, the winner not only gets to write history but also gets to set rules of the game so as to perpetuate its victory. This seemed to work until the world powers felt threatened by the emergence of new growing economies who not only worked hard but also played fairly on their rules.

 

Hence, the creators of the rules started to break them and oppose the system they themselves had set. At this point, the trade and investment in the world is conducted in ways which do not adhere to the rules set by the existing international agreements and texts. Worse of all, economic and financial policies are used as instruments for offensive or defensive purposes. Still, from a liberal perspective, neo-mercantilist thought is often despised as outdated, short-sighted, and even irrational. Moreover, after decades of liberalisation, rapid economic growth, and poverty reduction, should the economic policy not tend towards free trade? 


Reasonably so, but the reality is obstinate. Governments all over the world are aware of the costs involved with the geo-economic fragmentation. Nevertheless, economic security, energy autonomy, and self sufficiency are more relevant in foreign and economic policies rather than the embracement of free markets and a rule based global order, which is why neo-mercantilism is defined as, “A belief in the need for strategic trade protectionism and other forms of government economic activism to promote state wealth and power in the post-Smithian age” (Helleiner, 2021, p. 4).


Currently, trade between countries is marked by high tariffs, non-tariff barriers, and protectionism. A perfect example of this has been the US-China trade war, where the US imposed high tariffs on Chinese goods and China reciprocated in the same manner. The approach has cast a shadow on almost every country, and India is no exception. It is  evident from policies like ‘Make in India’ and ‘Startup India’, which aim to channelise our demographic dividend and fuel the manufacturing sector. But this comes at a time when a vacuum has been created by China’s shift from an export-oriented economy to a consumption-driven economy. Therefore, India should use it to its advantage and advocate for free trade which might bring more foreign direct investment into the country and develop  domestic industries.


On the other extreme, if India follows this neo-mercantilist approach, it will help protect its sensitive industries, which are not yet ready for an external influence, such as agriculture. India’s largest proportion of the population is still engaged in this sector. Pertaining to a lack of education amongst farmers, old mechanisms of farming are still followed in a huge part of the country. Opening up this sector to the world will put  Indian farmers, comprising almost 60% of its labour force, in a highly disadvantaged position which India cannot afford. Moreover, this policy can limit the dumping of goods in Indian markets with the help of protectionist measures. 


However, an argument is raised by the proponents of free trade that neo-mercantilism might bring the revival of Licence Raj, given the same rationale had been used by the early governments to not liberalise the economy. An answer to that lies in the very definition of neo-mercantilism that it advocates for ‘strategic protectionism’ which means it targets specific goals, like nurturing a new industry or protecting a sensitive one; on the other hand, regular protectionism has a broader aim of shielding domestic industries from foreign competition.


So, India has to cleverly and strategically manipulate the world of neo-mercantilism so as to maximise her benefits. History has shown how different countries have navigated through multiple similar phases. Developed countries have manipulated the concept of free trade to their own advantage and now it is time for India to buckle up for the same.


The author is a student at Ramjas College, University of Delhi





References

Aiyar, S., & Ilyian, A. (2023, March 27). Geo economic fragmentation and the world economy. Voxeu. https://cepr.org/voxeu/columns/geo-economic-fragmentation-and-world-economy


Helleiner, E. (2021). The Neomercantilists : A Global Intellectual History. Cornell University Press


Helleiner, E. (2023, April 27). The Revival of Neomercantilism. Phenomenal World. https://www.phenomenalworld.org/analysis/neomercantilism/


Sanyal, S. (2024, January 9). Is China’s consumption story over?. CNBC. https://www.cnbc.com/2024/01/10/is-chinas-consumption-story-over-heres-what-experts-are-saying.html


Steinberg, F. (2023, May 5). The Neomercantilist Moment. Centre for Strategic and International Studies. https://www.csis.org/analysis/neo-mercantilist-moment



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