Liberal and Mercantilist Theories of Political Economy

Contrast liberal and mercantilist theories of international political economy and consider which approach is most apparent in the contemporary world.

The following seeks to contrast liberal and mercantilist theories that have developed to describe and analyze the international political economy. Once the contrasts have been made conclusions as to which theory is the most apt or apparent in the contemporary world will be drawn. Both liberal and mercantilist theories have advantages and disadvantages when used to understand the international political economy in the present global system. Perhaps it would be more apt to describe the liberal theory as being neo-liberal as it has undergone a recent revival in popularity.

It must be remembered that whether a state is most influenced by liberal or mercantilists theories that trade will never be completely free of duty and tariffs, as they are useful sources of revenue for governments. Governments also have to have relationships with other governments and non-state actors that may or may not share their worldview.

Liberalism itself can be dated back to the English, American and French revolutions of the seventeenth and eighteenth centuries, when the mercantilist economic system evolved into capitalism. Liberals were originally regarded as being politically centrist or left wing in outlook but favoring little or no state intervention in the economy. In its original form liberal economic theory strongly advocated a free market approach with states not using tariffs to prevent competition from other countries and not interfering in their own internal markets (Comfort, 1993, p. 345). The basis of liberal theory was the right to gain property or capital to be used however states, businesses or individuals felt appropriate combined with freedom of action and belief (Eatwell and Wright, 2003, p. 27). In classical liberal theory the free market sets the prices for goods, currency exchanges, resources and even wages. However fluctuations within the free market can have serious political as well as economic consequences such as unemployment and poverty that can be made worse by international competitors. Governments have attempted to circumvent these problems by setting up welfare states, imposing strict tariff restrictions on imports or subsidizing industries and businesses. The restriction of trade and the use of tariffs are the main basis of mercantilist theory (Harvey, 1995, p. 6).

Liberalism was apparently strongest in the international political economy during the 19th century as Britain dominated world trade removing barriers in it’s way to free trade. Liberal capitalism seemed to be unstoppable during this period. The economic elites of the less developed states were content to play a subordinate role as they were still making profits for themselves (Hobsbawm, 1975, p. 38). However, there were moves away from free trade towards a more mercantilist or restrictive trade practices most notably in Germany and United States whilst even the British started to doubt free trade. After World War One liberal theory seemed to decline in prominence within the international political economy (Hobsbawm, 1987, p. 54).

It was a great paradox that liberal theory would regain some of its prominence in international political economy after 1945 just as the free market within most of the world was either tempered by welfare states or communist takeovers. The United States promoted freer trade both out of self-interest and the desire to prevent the great failings within the international political economy during the inter-war period. Through the World Bank, the International Monetary Fund and the Bretton Woods agreement the United States government ushered in an era of liberalism that is still in operation to this day. However, it was not the unrestrained free trade international political economy of the 19th century but without American aid it is doubtful if Western Europe and Japan would have recovered so well to play such key roles in the present global economy. However the World Bank and the IMF are founded on the principles of liberal theory and generally insist that all countries they loan money to adopt those free trade policies that stem from liberalism. Governments that have to accept these loans leave their economies open to multinational companies and have to reduce spending on welfare and education (Keegan, 1992, pp.16-17). United States domination of the international political economy meant that it could promote the liberal theory of free trade even if it allowed its partners to have tariffs whilst it did not. United States share of world trade declined its share of global exports declining to 13% in the 1980s from its high point of 29% in 1953. However the American based multinational companies such as Coca-Cola and Microsoft have great influence on the global economy due to their size and profitability. Americans continue to believe that liberal theory holds the key to ensuring international prosperity and many nations either through choice or lack of autonomy pursue liberal policies as well (DuBoff, 1989.p.158).

Liberal theory does not completely dominate the international political economy as tariffs were not completely removed from all countries and there was the establishment of trading blocs. Blocs such as the European Union (EU), The North American Free Trade Association (NAFTA) and Mercosaur in Latin America offer favoured trading terms to members but not always to non-members. The economic advantages offered by free trading areas act as an incentive for non members to adopt liberal policies, for instance the former communists states of central and eastern Europe. For much of the post war period there was also the apparent rival economic and political theory of communism represented by the Soviet Union and its Central and Eastern European satellites. The collapse of communism certainly made liberal concepts within international political economy more apparent in the contemporary world (Keegan, 1992, pp. 3-4). The former communist countries of Central and Eastern Europe and the Soviet Union have all to some extent attempted the twin convergence to liberal democracy and capitalist economy. The opening up of these countries to liberal free trade led to unemployment, the closure of uncompetitive factories and inflation. Russia and its ‘young reformers’ was not the only country to attempt shock therapy to cure the stagnation caused by central planning (Freeland, 1999, pp. 34-35). However, the economic and political transitions have been more successful in Poland, Hungary and the Baltic States that have since joined the EU.

It could be argued that liberal theory of free trade proved attractive to reformers whilst ordinary, people wished to have higher standards of living as in the United States, Japan and Western Europe (Agh, 1998, p.3).

The mercantilist theory is in effect the opposite theory to the liberal theory. Mercantilist theory equates to restrictions being placed upon free trade when governments are more prepared to intervene in the international political economy or if needs be to by pass it. Mercantilist theory and practice led to the creation (or explained it at any rate) of separate trading blocs and economic nationalism within the international political economy. Economists and historians have argued that modern capitalism developed from an earlier mercantilist period when the empires built up by the European states such as France, the Netherlands, Spain and Portugal competed for global domination and tried to restrict trade to within their own empires. Each country would try to increase its power by gaining colonies, economic influence and more consumers for its goods. Britain by virtue of its naval supremacy and earlier industrialization was able to dominate the international political economy. Where possible Britain removed mercantilist restrictions to trade, allowing workers, businesses and investments to flow more freely (Hobsbawm, 1975, pp. 36-37). However, mercantilist theory and policies remained and still remain in the international political economy. Countries such as Germany, Russia, Japan and the United States used protectionism to start up and enhance their industrialization preventing more efficient rivals from shutting it down. Japan would become the role model for importing superior foreign goods, copying them and them exporting cheaper versions. Meanwhile a renewed wave of imperialism at the end of the 19th century increased the competition for colonies and captive markets. Mercantilist theory was popular then and is attractive now because of its emphasis on national self -interest and gaining at the expense of others. However, the advantages of domestic popularity and employment protection need to be considered in relation to consequences within the international political economy. The United States is as keen to pursue free trade liberal policies as the British used to be, because they gain the most from those policies. Smaller nations on the other hand are dependent on the richer nations and might prefer to restrict trade to protect their industries and jobs but often have that choice taken away from them (Hobsbawm, 1987, p. 54).

There are various ways in which mercantilist theory can be put into effect. Methods include the imposition and weighting of tariffs (more restrictive towards unfriendly nations, less restrictive for friends or allies), the restriction or complete ban of certain goods and quotas. Not only can restrictions be used to gain economic advantage they can also be used as political and economic sanctions against states that have transgressed in some way. The effectiveness of sanctions in forcing countries to change their behaviour remains largely unproved both in the past and in the contemporary international political economy. The possible exception to this is the supply of crude oil, which is so crucial to the economies of North America, Europe and Asia. This reliance upon oil gave the oil embargo of 1973-74 such damaging effects on the global economy. The further price rises following the Iranian revolution in 1979; the Gulf War of 1990-91 and more recently the invasion of Iraq demonstrate the vulnerability of the international political economy to the restriction of essential resources. However the governments of the oil producing states are normally happy to take part in free trade even if liberalism is the last thing they would support at the domestic and national level (Harvey, 1995, pp. 288-89).

The inter-war period provides the best examples of the bad consequences of an imbalance between liberal and mercantilist influences on the international political economy. Tariffs were raised through out that period yet offered little but short-term advantage at the expense of international co-operation and trade. Whilst Britain and France increased their exports to their colonies and restricted imports from rivals, Italy, Japan and Germany looked at conquest as a means of economic expansion. These mercantilist measures did little to protect and in fact further harmed the international political economy following the great depression after 1929 (Brendon, 2000, p. 165). Added to the instability was the harshness of the Versailles settlement that prevented Germany’s economic revival and badly effected the economic fortunes of the rest of Europe. Resentment of the settlement assisted the Nazis Party aided by economic weakness (Smith, 2003, p. 160). The events of the inter-war period are relevant to an understanding of the contemporary international political economy due to the way in which governments and organisations have tried to prevent similar events happening again. Liberalism is seen as the best means of achieving stability and prosperity just as much now as it did in the past (Smith, 2003, p. 161).

After 1945 the United States government extended aid not only to its allies such as Britain and France but also defeated enemies in the form of Germany, Italy and Japan. Under the Marshall plan $17 billions of American aid boosted reconstruction in Western Europe (Central and Eastern European countries were forced to refuse by the Soviet Union) that ensured long term stability and prosperity. This is relevant to the present international political economy because it assured the predominance of liberal theory even though it did not completely eliminate mercantilist theory (Ambrose & Brinkley, 1997, p. 87). The post-war economic growth of Germany and Japan (the Western part anyway) was aided by the selective use of subsidies and tariffs to promote the most effective parts of the economy rather than the least effective. Germany of course also had to set tariffs in line with its EU partners whilst Japan has not such constraints (Keegan, 1992, p.145).

Countries within the international political economy have to find a balance between national self- interest and maintaining worthwhile international trading relationships. Whether guided by liberal, mercantilist or any other theory governments are often guided in their approach to the internationalist political economy by pragmatic considerations. Decisions made on pragmatic basis can later be justified in the mane of liberal or mercantilist theory. The rise of international trading blocs has generally led to a liberalization of trade within those blocs most notably within the single market and single currency of the EU (Smith, 2003, p.230). The cost of failure or the benefits of success of liberalization of trade within the international political economy are great. The General Agreement on Trade & Tariffs (GATT) has often been involved in complex trade deals and tariff reductions. Failure to agree can lead to the costly maintenance or extension of trade restrictions. Reductions in tariffs have been substantial. For instance the cuts agreed to at the Uruguay round of GATT amounted to a $744 billion reduction in tariffs across the international political economy. Such deals demonstrate the intentions of many governments to make the international political economy as liberal in nature as possible but without losing too much of their own position (Ambrose & Brinkley, 1997, p. 410).

Arguably the liberal theory is the most apparent within the contemporary international political economy. However this has to be considered with remaining vestiges of mercantilist theory. Liberal theory received a revival from the 1970s onwards with the emergence of neo-liberalism. Neo-liberalism became most closely associated with Margaret Thatcher in Britain and Ronald Reagan in United States being referred to as Reaganomoics and Thatcherism. They wished to turn the clock back to unrestricted free trade internationally and the free market domestically with reduced welfare states (Keegan, 1992, p.25). Ronald Reagan in fact increased public spending particularly in a renewed arms race with the Soviet Union. An unintended consequence of that policy was the collapse of the Soviet Union and the communist regimes of Central and Eastern Europe (Carroll & Noble, 1988, p.433). The re-emergence of liberal democracy and capitalism in the former Soviet Union and Central and Eastern Europe strengthened the role of liberal theory in the international political economy. This strengthening happened because of the liberal minded policies of reformers in those countries even though the transitions proved far from straight forward (Agh, 1998, pp. 2-3)

Therefore within the present international political economy liberal theory is more apparent than mercantilist theory. The apparent dominance of liberal theory can be explained by the continued strength of American and other major multinational companies, and the political, economic and military might of the United States. Liberal theory is further promoted by institutions such as the IMF that influence developing states into pursuing free trade policies. Developing and former communist states such as Poland also see that adopting liberal theory can be to their political and economic advantage, especially if it allows them access to trading blocs like the European Union. Trading blocs may operate liberal theory within the confines of their members but they can display mercantilist tendencies by restricting trade with non-members. Liberal theory is also promoted by the process of globalization that makes it easier for multinationals to operate within. The increasing use of information technology allows trade to be carried out faster with less chance of governments intervening. Yet mercantilist theory is not likely to disappear from the international political economy just yet as governments are as likely to be guided by national self-interest and pragmatism as they have always been.

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