Mercantilism and Economic Nationalism
Lecture 2

Mercantilism

1. Mercantilism – the oldest and most powerful
   1. Rise of the modern nation-states in Europe during 15 ^th and 18 ^th centuries
   2. Nation / state creates wealth and power
2. Economics – International trade
   1. Everyone wins
   2. Positive sum game
3. Mercantilism – one gains while another loses
   1. Free trade is a myth
   2. Us versus them
   3. Nations only promote free trade if it promotes their national interest
      1. 19 ^th century Great Britain
      2. 20 ^th century in the United States
         1. After War World II, Europe’s factories were destroyed and had to buy from the United States
         2. Large expansion to the U.S. manufacturing during the 1950s and 1960s
4. Mercantilism (Old definition) – state promotes exports and limits imports
   1. Creates trade surplus
   2. Causes inflow of money into country, i.e. gold and silver
   3. Creates wealth and power
   4. Could cause inflation
      1. Spain found gold in Mexico during 16 ^th century
      2. Stole from the Aztecs
      3. Spain no longer a world power
   5. Expand definition
      1. States finance industries
      2. Build roads – employ the unemployed
      3. Improvement in navigation and shipping
      4. States imported skilled labor to build ships and ports
      5. Trade protection - financed by putting taxes on imports
   6. Who benefits?
      1. Monarchy, such as kings, queens, etc.
      1. King used the gold to buildup a strong military
         1. Enhances the king's power
      2. King granted licenses and permission to industry
         1. Allowed monopolies to form
         2. Allowed exporting firms to export products
         3. Businessmen paid the king for these rights
      2. Gov. bureaucrats
      3. Merchants and joint stock companies
5. Countries have fought many wars
   1. National security was a primary issue
   1. Security is expensive
   2. Finance armies and navies
   3. State defends itself against other states
   4. Wealth allows countries to buy weapons
   5. State has to generate wealth
   2. A vicious cycle
      1. Wealth creates power
      2. Power create wealth
   3. A weaker the nation the weaker and more vulnerable
   4. National security – states compete for natural resources, geographical location
   5. Military has to be strong

Economic Nationalism

1. Economic nationalism – a form of mercantilism in the late 18 ^th and 19 ^th centuries.
   1. Focus on internal development
   2. Britain became powerful during 19 ^th century
      1. Improvements in production technology, (communication), and transportation
      2. Economies became national
         1. Development of markets and fairs
         2. Economies were local or regionally based
         3. Urbanization
      3. Regions specialize in production of goods and services
   3. Germany and U.S. were concerned
      1. Export agricultural products to Britain
         1. Ag. Products tend to be low value
      2. Imported manufactured goods
         1. Products tend to be high value
      3. Germany and U.S. dependent on trade
      4. Countries wanted to develop their own industries
      5. Create an engine of wealth and power
   4. American Alexander Hamilton (1755-1804)
      1. U.S. came into existence in 1791
      2. Hamilton – wanted trade protection
      3. Protect U.S. industries
         1. U.S. industries were young and needed to thrive and grow
         2. Imposed tariffs on imports
         1. Tariff is a tax on imports
         2. Gives U.S. gov. revenue
         3. Wanted to give subsidies to industries
      4. Note – import substitution; a country helps develop a domestic industry that substitutes for imported products.
   5. German Friedrich List (1789-1846) – exiled from Germany for his views
      1. State action was needed to promote education, technology, and industry
         1. Promotes industry
      2. Industries require more mental abilities than in agricultural
   6. End of 19 ^th century, nations produced manufactured goods often exceeded the ability for its markets to absorb them.
      1. Countries turned to imperialism
      2. Invade new countries
      3. Create colonies
         1. Colonies are a source of raw materials and resources
         2. Colonists buy manufactured products from home country
2. International trade – free trade would quiet down mercantilism and economic nationalism
   1. International institutions that promote free trade
      1. General Agreement on Tariffs and Trade (GATT) – the old one
      2. World Trade Organization (WTO) – the new one
   2. Market forces via trade
      1. Money and foreign investment tend to jump national boundaries
      2. Escape political control
      3. Integrate societies
   3. Government restricts the economy
      1. Because the economy serves the interests of the state and the powerful groups within it.
   4. Economic interdependence – creating neomercantilism
      1. Neo means new
      2. Organization of Petroleum Exporting Countries (OPEC) –
         1. Oil cartel of Saudi Arabia, Kuwait, Iraq, etc.
         2. Raised the price of oil
         3. Cut back on petroleum production using quotas
         4. Embargoed oil shipments to the United States and the Netherlands
         5. Transfer of wealth from the developed countries to oil-rich countries
         6. OPEC is an economic power
      3. Countries want to protect themselves from OPEC
3. Banana Wars in 1999
   1. Between Europe and U.S.
   2. Europe limited imports of bananas from the U.S. and the world
      1. Give support to banana producers in the ex-British and French colonies in the Caribbean
      2. Hurt U.S. corporations, Chiquita and Dole
      3. Note – U.S. does not grow bananas
   3. World Trade Organization ruled in U.S. favor
      1. Europe did not comply with WTO
      2. U.S. retaliated against Europe
      3. Imposed 100% duties on cashmere sweaters, pork, wine, cheese, fruit, and toys.
   4. Europe wants to control types of goods that enter into Europe
      1. Sovereignty – free to rule themselves
      2. Genetically modified foods
      3. Corn
         1. Corn worms eat genetically modified corn and die
         2. Corn contains genetic material from a virus that kills the worms
      4. Hormone-enhanced beef – cattle are given massive amount of hormones to growth bigger
   5. Politics
      1. Congress held impeachment hearing against President Clinton
         1. Clinton lied about his relations with a college intern
      2. Chiquita made large contributions to politicians in Washington
4. Industrial espionage — the business of spying and gathering secret intelligence
   1. U.S. – Soviet Union – spying was for military security
      1. Created vast networks to spy and gather intelligence
      2. After Soviet Union dissolved in 1991 – states and businesses use spying to acquire information and technology.
   2. China
      1. Use visiting students and professors to penetrate academic and corporate labs
      2. China supposedly stole info. about atomic warheads, the neutron bomb, and satellite technology
   3. Germany spends money on computer espionage
      1. Hacks into computer bases of other nations and businesses.
      2. German computer-hacking school in Frankfurt.
   4. Bug hotels and flights of executives of large companies
   5. 75% of commercial intelligence is available from computers, publications, and research / business journals
      1. U.S. Patent Office is on the internet - easy to steal patents
5. Countries promote development of defense industries
   1. Military –industrial complex
   2. Benefits
      1. Produces military weapons and defense-related technologies and products.
      2. Industrial production spills over into other parts of the economy
         1. Creates jobs and new products
         2. Example – Internet
            1. U.S. military developed internet in 1960
            2. Nuclear bomb destroys a city, the internet still works
      3. Increases self-sufficiency and political autonomy
         1. Countries do not want to be dependent on foreign countries for critical resources and products
   3. Conflicting goals
      1. U.S. restricts info. about high-tech weapons
      2. U.S. sells military weapons for money
         1. Problem – weapons can be reversed engineered
         2. Reverse engineering – dissemble a product and learn how to make it