Kinnaird College for Women

International Relations

Pre-Mid Assignment no.2: Neomercantilism in the Current Global Order:

Case Study of US China's Trade Wars
Name: Najm ul Sahar Riaz

Semester: BA. 5

Session: 2019-2023

Name of Instructor: Dr. Asia Mukhtar

Course Title: International Political Economy

Date of Submission: 29th September 2021

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 Abstract

The mercantilist policies were seen at rise when European nations colonized the world, but the
decline was witnessed after the 1700s and till the Great Depression, mercantilism was seen as
diabolic. However, the decline of mercantilism gave rise to the neo mercantilism ideology which
viewed economic interdependence as a weakness. The New Global Order after the end of Cold
War saw the rise of China as the economic giant which stood as a competitor in the way of USA.
Under Trump’s presidency, neo mercantilism was seen under his economic policies which also
gave rise to the US China Trade Wars. On a wider and grander scheme of planning, both
countries point at each other’s practice of neomercantilism while incorporating the doctrine of
classical mercantilism both countries are practicing the same the under the context of trade wars.

Key words: Mercantilism, Neo Mercantilism, New Global Order, Economic Interdependence &
USA China Trade Wars

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Introduction

Mercantilism is one of the economic policies which evolved from the time of the European
colonist when the European powers had a foreboding feeling to protect their extended markets
from each other. However, as a theory mercantilism evolved around the centrifugal forces of
balance of trade. The balance of trade is of paramount importance to mercantilist doctrines which
reflected the idea that only one nation could benefit at the expense of other nations which also is
the principle of competitive advantage. However, in today’s era of globalization we see the rise
of neomercantilism which branches from mercantilism. The neomercantilism policies are what
governments in the current timeframe apply when they want to increase the number of foreign
reserves held by government to have an impacting monetary policy and a fiscal policy. The
current context of China buying US treasury and the US China trade wars under President
Donald Trump reflects neomercantilism policies on both ends.

Thus, this assignment will discuss the history of mercantilism evolving into neomercantilism
after the commencement of globalization and its impact on the mercantilist policies. A
comprehensive case study of US China Trade Wars will be in to discuss the neomercantilism
policies.

History and the Evolution of Mercantilism

Mercantilism was adopted by the European nations between 1500 and 1800 when the
mercantilist nations (European Nations) implemented policies such as tariffs and subsidies to

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make the imports expensive. The word mercantilism itself originates from the term ‘mercantile’
which is extrapolated from merchants and trade. Therefore, mercantilism is the philosophy and
belief that trade with other nations should be regulated through what is now known as
‘protectionism’ (Boyce, 2020).

The advent of industrialization and capitalism paved the platform for mercantilism which was
the phase where the self-governing nations to protect businesses and rights of merchants who had
their business established abroad. Moreover, these merchants who had set up trading points in
the colonies also vouched for the national government of the mother country so that their
businesses and trading routes were protected. For example, the British Merchants using their
own Parliamentarian laws in the Indian Lands when the East Indian Company was set up. This
way, the Indian raw materials were monetized. Thus, mercantilism was intertwined with imperial
capitalism as the European governments would use the protectionist measures against each other
as well. The British applied Corn Laws to protect their domestic markets from foreign
exploitation.

Mercantilism also went in lieu of gold standard as the European states at that time paid each
other in gold for exports as these states were the ones with the most gold. Thus, they would pay
each other in gold for exports. Moreover, in the historic context, wars would be waged as another
mercantilist technique which was another technique to protect themselves. Hence, the result was
that all countries wanted a surplus in trade rather than a deficit (Amadeo, 2021). Historically,
mercantilism was heavily reliant on shipping. For instance, as England was the controller of the
world’s water ways at that time, and to create a mark in the international political economy at
that time. The countries developed a strong merchant marine and used protection policies to
impose heavy port taxes on the foreign ships. England again is the example of how it used
mercantilism policies to become a major European power and create colonies in various parts of
the world.

The Decline of Mercantilism

However, in the late 1700s, a decline of mercantilism was witnessed when a rise was seen in the
tenets of democracy and free trade. The American and French Revolution commenced a surge of
revolutions which remarked the beginning of the doctrine of democratic values. This prevalence

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of ideas and literature from economists such as Adam Smith in the “The Wealth of Nations”
argued that foreign free trade in aligned with the idea of comparative advantage was important.
Henceforth, European Nations and the United States of America became cognizant of the fact
how laissez faire was a much better system rather mercantilism. However, in 1791, U.S.
Treasury Secretary Hamilton was an ardent patron of mercantilism despite the situation of
mercantilism breaking down. He still came about policies that were on a façade protecting the
infant industries which were important to national interest, by utilizing mercantilist policies. He
came to the decision these infant industries were to be protected by the government, so the
government impose tariffs to reduce the competition in those areas. In a nutshell, he believed that
mercantilism was a better economic system so that the domestic formal sector was celebrated.
However, the fatal blow was witnessed in the time of The Great Depression especially in USA
where laws such as Smoot-Hawley Act increased tariffs on many commodities. On the contrary
there was states with Fascist and totalitarian ideologies who established their economy using
mercantilism. In any case, however it maybe, the post-World War I era contributed to the
downfall of mercantilism (Heilperin, 1960).

The Rise of Neomercantilism

The rise of neomercantilism was witnessed right after the second world war as mercantilism was
seen as a dangerous policy to the emerging globalizing world. They Allied nations created the
World Bank, the United Nations, and the World Trade Organization to highlight the narrative of
global cooperation. However, there were nations like Soviet Union and China who were not able
to agree such as the USSR and China continued to promote a branch of mercantilism which is
neomercantilism. The main difference from this was that they relied on a centrally planned
command economy which gave them the pathway to regulate foreign trade and control the
balance of payments and foreign reserves which also allowed their leaders to select which
industries to promote. However, it is important to note that that USSR and China also shifted
from state owned businesses to private ownership after selling which gave a notion to the rise of
neomercantilism. Another example of the rise of neomercantilism was seen during the currency
wars at that time between USSR and USA as USA tried exporting commodities at a lower
pricing power. Henceforth, this rise in neomercantilism policies was seen right after the
commencement of the Cold War.

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Neomercantilism In Today’s World

Despite the immense globalization that has taken place in the current context, neomercantilism
policies are still illustrated in today’s world. The current global order is cognizant of the growing
interdependencies, and these interdependencies can become a threat to the domestic systems of
political economy. Thus, the to save the domestic order from the generating new threats from the
foreign systems of politics and economy, and along with the new rising opportunities to gain
relative advantages in power and wealth, we see the most apt example of neomercantilism in the
US China Trade Wars. The fusion of the economy with the political and military interests of the
state is the defining characteristic of mercantilism, but neo mercantilist label is what first the US-
China situation (Muellar, 2021).

Case Study US China’s Trade Wars

Though American policy analyst are often fond of remarking China of using mercantilist policies
as a practitioner of unfair trader that protects its own markets while overly benefitting from the
US markets. For instance, China buying U.S treasury to charge its trade with United States of
America and through such means China became one of the largest foreign owners of the
American debt. However, during the presidency under Donald Trump, America was criticized of
using neomercantilism policies on their own so that they could protect their domestic markets
from Chinese markets influence. Trump’s own use of neomercantilism policies in lieu of China’s
use of mercantilist policies illustrate how neomercantilism and classical mercantilism are still
present in the current global context.

China’s relationship with USA before the presidency of Donald Trump was contingent on
benefitting from U.S markets also showing the mercantilist principle that one state will benefit at
the expense of the other states. Chinese markets have also been open to U.S investors, but due to
more purchasing power and economic power of the Chinese, they have been able to benefit more
that the US investors. Thus, China has always been labeled as the mercantilist state. Moreover,
the capital integration and the division of labor between the two states does illustrate that both
have monetized over each other’s resources, but China has had an upper hand. On the contrary,
states who have blatantly blamed China for their mercantilist behavior are the ones who have

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also been ardently supporting tariffs, industrial subsidies and has advocated for national security
barriers of their own. Thus, to blame China all in all for a mercantilist approach is not just. In
fact, both sides can be seen practicing neomercantilism or mercantilism, adopting an interactive
behavior of a nation-state because at the end of the day both states are competing towards
becoming economic hegemon of the world. Therefore, it is highly imperative to review Donald
Trump’s neomercantilism policies.

Though, USA has always faced liberal economic policies as the basis of the elected political
leader, and USA has always been an advocate of policies which embody the idea of the free
movement of goods on a global scale¸ but in 2008, USA was compelled to question the current
global economic liberal order. Then in 2016, the person who was amongst the people who
questioned the economic liber order became the president of the United States of the America.
Trump outwardly blamed the decline of the U.S global power on the international economic
system and established the fact that the international intervention in the USA’s open market
would weaken the American system of open markets. He believed that the downfall of the US
markets was due to the economic system; thus, he went forward to create neomercantilism
inspired slogans which went by as “Make America Great Again.” Therefore, Trump came up
with policies which focused upon the American interests in a commercial sense and developed a
platform which defended and protected the economy of U.S.A from external influences. This
again paved a pathway for the rivals of United states of America, predominantly China to use
criticize the neomercantilism agenda of USA. Even the European Allies became aware and
criticized USA of their neomercantilism agenda. This became an obstacle in the pathway of the
US which were perceived negatively even by the allies, causing USA to become isolated in their
foreign policy (Kurt, 2021) .

However, the context of US China’s trade wars is a broad concept which bring about the role of
several other variables such as the trade policy, tech policy, foreign policy, cybersecurity,
military strategy, industrial policy, foreign policy, intellectual property rights, and innovation
policy. This one way or the other these broad concepts of trade war reflect a digitized sort of
neomercantilism in the current context of their interaction. This sort of neomercantilism structure
of trade war means that both states are in the pursuit of geopolitical power via political economic
systems. Both states view the level economic interdependence between each other as a sort of

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weakness amongst themselves, thus, both realize that the interdependence can be exploited and
manipulated by both powers. This can be illustrated as by the neomercantilism agenda without
even using the term as both powers are implying the policy principle of competitive advantage.
The focal point of economic and strategic aims is not an inevitable outcome of the situation or
the outcome of one policy response (Gertz & Evers, 2020). The idea that the efficiency of the
states can be aligned with limiting the markets to domestic trade only is not at all correct, and it
has been argued by modern day researchers as well. O the contrary, this is literally illustrated by
ideas and policies propagates under the notion of US China trade wars, and this is what the idea
and policies also denote; neo mercantilism.

The US China trade wars basically exploit the narrative of economic interdependence which can
be denoted by the terms of ‘weaponizing interdependence’. The instance of the USA’s attack on
the Chines Huawei’s race under the 5G race reflects how USA views and applies neo
mercantilist policies. The idea of big data under the domain of software and networks is of
paramount importance to USA, but seeing China emerge as a dominant player, caused USA to
use political means to create a pressure void. This weaponization of interdependence by USA
was portrayed by viewing Chinese products as threat to the existing place of USA in the tech
sector of trading. However, the means of creating a political pressure was only successful in
USA and not in the rest of the world. Thus, the success of this tactic be it only in USA reflects
USA’s weaponization of interdependence between the two states even in the economic sector.

The American economic sector has always used to extrapolate government’s motives about
geopolitics as well, and China has always tried to protect themselves from foreign information
services and even from foreign operations of cloud services and applications reflects the same
agenda of neo mercantilism in a digitized manner. Hence forth, the idea is presented clearly that
both nations, China and USA have been not only been cognizant about their practices of
neomercantilism, but also used interdependencies or viewed interdependencies as a vulnerability.
However, USA’s stance has been reflecting more of an aggressive stance on a comparative.
Conclusively, both countries view interjection of foreign systems within the political economy as
an overall threat. On a wider and grander scheme of planning, both countries point at each

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other’s practice of neomercantilism while incorporating the doctrine of classical mercantilism, in
reality, both countries are practicing the same the under the context of trade wars.

Analysis

Analytically speaking, countries with larger economic systems and residing over the idea of
hegemony has one way or another had to use the undertones of neomercantilism in the current
context of economic governance. Though mercantilism kind of reflected upon isolated measures,
but neo mercantilist measures do not vouch for self-sustenance, but also ponder upon the
economic system which the current world thrives upon, interdependence. The case study of US
China Trade Wars is an apt example of neo mercantilism because both states cannot delve in
isolation, so they exploit the interdependence from which both states came as hegemons into the
current economic system. The states make sure to manipulate each other’s interdependencies to
make the other topple over one another. Although, USA has always been a patron of free
markets, but even to protect their markets, they even implied neo mercantilist measures. China,
on the other hand has always been accused of the classical mercantilist polices. The US China
Trade War context reflects that the current world, no matter how much globalized it is, will
always look towards neo mercantilist policies in order to protect the domestic markets falling
prey to foreign political and economic interests.

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rise-of-neomercantilism

Boyce, P. ( 2020, September 13). Mercantilism Definition. Retrieved from Boyce Wire :
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Dollar, D. (2020, December 13 ). Domestic and global challenges of China’s economic transformation.
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Gertz , G., & Evers, M. (2020). Geoeconomic Competition: Will State Capitalism Win? Competing with
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Heilperin, M. A. (1960). Economic Nationalism: From Mercantilism to World War II. Paric:
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Kurt, S. (2021). A Neo-Mercantilist Analysis of the Political Economy of U.S. Foreign Policy under
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Muellar, M. (2021, August 4). Why we need to start talking about neo-mercantilism. Retrieved from
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