International trade is an exchange of goods and services across international borders that worth about ninteen trillions dollars each year 1. International trades not only exchanging goods and services but it also often involves politics with actors like interest groups and other external factors that affect many states’ welfare.
In international political economy, the study of politics in international economic activities, scholars focus on activities such as trade, monetary relations, and multinational corporations through the lenses of mercantilism and liberalism. While both Mercantilism and Liberalism trust that economic activities can strengthen the power and security of a nation. However, these two principals seem to have a different methods of way to deal with a state’s economic activities.
Mercantilism is the oldest perspectives and can be considered as the important theory in international economy from the historical viewpoint. During period 15th-18th century in Europe, the idea of state building and state intervention in the market for the purpose of strengthening nation-state security dominated political economic thought. According to mercantilist, a nation-state could only achieve wealth and power by their efficient capability of military and economy to protect themselves from foreign invaders. Wealth and power is very important to protect the state as they believed the poorer, the weaker, the more easily for themselves to be invaded by enemy. Countries that adopt mercantilism into their ways of trading have enough capital for military spending. The wealthier the state is, the more money that the state can invest in military spending, making the nation richer while building its own powerful military.
For example, British government in the 18th century used such technique by keeping stockpile of money in the form of precious metal such as gold and silver, invest their wealth in military capabilities and became the strongest power in that time. To achieve wealth and power from mercantilist perspective are to promote export and limit import in order to generate trade surplus value which later constitutes for the wealth and power of a nation. Prosperity of a nation could be achieved by making many exports and few imports, thus building a net inflow of foreign exchange and increasing the country gold stocks. In relative to that, mercantilists believed that there was only a limited amount of wealth in the world and that each state must secure its interests by blocking the economic interests of other states. Mercantilism stands in contrast to the theory of free trade – which argues countries economic well-being can be best improved through the reduction of tariffs and fair free trade. Philosophy of zero-sum-game is not a philosophy for increasing global growth and reducing global problems but it can lead to selfish benefit- For example, trying to help a poor country will harm our own economic growth in the international trade. Mercantilism which stresses government regulation and monopoly tends to lead to inefficiency and corruption. Liberal economy theory is committed to free market or free trade.
Adam Smith in his writing of “The Wealth of Nations” that the wealth of a nation will better to be served by policies of free trade 24. If a foreign country can supply with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our industry, employed in a way in which we have some advantages.”25 .The government involvement is being minimize so that the business are not restricted from exporting their goods and imports from other countries. Adam Smith resonated that market free from intervention of government were not chaotic and most likely achieve mutually beneficial cooperation through an efficient division of labour. Different from mercantilism – it is a positive-sum game which everyone will gain benefit once the business is operated. It also known for theory of comparative advantage which this theory lends support to the nation of the invisible hand by offering an economic rationale for why free trade produces more trade and more wealth for all nations.
According to liberalism, the economy should be free of all but a very few government policies. Liberals argue that it is the invisible hand that controls the market within a state and that the government should not interfere but merely set international economic policy according to where the market is headed within the state. The invisible hand is most likely today known as ‘market forces’. Furthermore, market approach with states not using tariffs to prevent competition from other countries and not interfering in their own internal markets. Government protectionism is being throw away in this theory. International economic is a cooperation and not competitive. As a conclusion, it is obvious that mercantilism and liberalism is different. The rationale of the market system of the two ideologies is to enhance power and security of the country, however their approaches to the market system are dissimilar and the tension between the two ideologies still occurs nowadays.
Even though this both theories are different, it still have the value of existence respectively in international political economy.