By: Cadet Ryan Smith
The ideas and recommendations of the mercantilists of the 16th century are normally considered to be outdated and economically ill advised. Yet, despite the advances in global understanding of the economy many nations have reverted back or simply maintained this form of thinking and operating. Most notably is China, who adheres to the many tenets of mercantilism despite overwhelming evidence of the systems drawbacks.
The mercantilist belief system was founded on the principles of equating the wealth of a nation with the amount of gold and silver bullion that it possessed. As a result of this belief, a surplus of national exports was needed to bring the currency into the nation. To aid in the accomplishment of the mercantilist ideals it was necessary for a strong prevailing sense of nationalism to project the nation’s power throughout their trade region. In addition, the mercantilists required that a nation have a large population to be used a national workforce thus keeping the supply of labor high and keeping the wages of the workers low.
China has seemingly been operating from the pages of a mercantilist pamphlet as they actively work to continue a large trade surplus with the rest of the world. In 2006, China’s global trade surplus jumped nearly 75% from 2005. The $177.5 billion dollar trade gap has soared due in large part to China’s position as the world’s premier location for the production of low-cost goods such as furniture, shoes, and multiple other goods. The trade surplus was a result of China’s exports increasing by a rate of 27.2% to a tune of $969 billion. The surplus is a product of national goals to depreciate the Chinese currency (the Yuan) in order to bring more foreign money into the country. This controlled currency policy has allowed for China to maintain a currency depreciated by as much as 40% against the dollar.
China has openly expressed their desire to maintain a strong national surplus in order to protect their fledgling industries. China has managed to be a net automobile exporter doubling their pervious year’s exports in 2006. The government has begun to curb import growth by imposing restrictions on spending of fixed assets in factories. The reason for the ban is that many of the fixed assets are produced by foreign nations and China believes that and overinvestment will ignite inflation. In addition to the ban on some fixed assets, there is a ban on many foreign automobile imports. This forces companies such as Toyota to locate plants in locations within China such as the Guangdong province.
Also, China maintains a large and hardworking population. Mercantilist maintained that not only would this large population provide the nation with an able-bodied workforce, but it would also provide an abundance of soldiers and sailors ready to fight. This large population has allowed China to keep labor supply high and wages low. The low wages would enable prices of exports to be kept low thereby substantially increasing the flow of currency into the county. As this money flows into the nation, China is employing their vast wealth into launching a massive Navy divided into carrier groups in order to project the will and power throughout the globe. This nationalistic approach to trade further supports China’s mercantilist goals.
However, China is already beginning to see the affects of this outdated economic policy. The trade imbalance and the subsequent influx of currency in China’s domestic banking system has pushed up inflation now running at 1.9%. This is a result of the specie flow mechanism which explains how the influx of money into a domestic economy will put upward pressure on prices. This danger is so evident that the Minister of Commerce Bo Xilai has stated that reducing the surplus will be a top priority for China in 2007. In addition, the artificially low wages in China have angered international trading partners. In 2006, China experimented with raising their currency against the dollar 3.4%. The result was no obvious impact on exports, imports, or foreign investment. China appears to be moving away from the mercantilist system.
China developing economic system has been utilizing the mercantilist approach to the economy. While this makes little economic sense, it fits historically into the pattern that our own nation has followed. Developing nations cannot be expected to automatically adopt all modern economic policies. Much like a child, the individual nations must learn on their own which systems work the best.
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