# Understanding Mercantilism: Key Concepts and Historical Impact

## What Is Mercantilism?

From the 16th to the 18th century, mercantilism dominated economic policy in Europe. This system hinged on the belief that global wealth was finite, and urged governments to tightly regulate trade to amass wealth and bolster national power. European nations, under mercantilism, sought to expand their share of global wealth by promoting exports and curbing imports through protective [tariffs](https://www.investopedia.com/terms/t/tariff.asp).

### Key Takeaways

*   Mercantilism was an economic practice from the 16th to 18th century, where nations sought to increase wealth through export surplus and controlled trade.
*   The system emphasized accumulating precious metals and often used military force to protect trade interests and enforce monopolistic practices.
*   Mercantilist policies favored colonies as sources of raw materials and as markets for exports, exemplified by the British Sugar and Navigation Acts.
*   Although considered outdated, elements of mercantilism persist today, with countries like China and Russia controlling trade and imposing tariffs.
*   The rise of capitalism offers more consumer choice and less government control in trade compared to the restrictive practices of mercantilism.  
    

![Mercantilism definition](https://www.investopedia.com/thmb/vqLlKtoPNenxKRFlUItZGVXV9Bs=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Term-Definitions_Mercantilism-ff94d1d02ec6469b95ae770623ed9f93.jpg)

*— Investopedia / Mira Norian*

## Exploring the Fundamentals of Mercantilism

Mercantilism was a form of economic nationalism that sought to increase the prosperity and power of a nation through restrictive trade practices. Its goal was to increase the supply of a state's [gold](https://www.investopedia.com/articles/economics/09/why-gold-matters.asp) and [silver](https://www.investopedia.com/terms/s/silver.asp) with exports rather than to deplete it through imports. It also sought to support domestic employment.

Mercantilism centered on the interests of merchants and producers (such as England's East India Company and the Dutch East India Company) and protected their activities as necessary.

Mercantilism had several noteworthy characteristics.

**1\. The Belief in the Static Nature of Wealth**

Financial wealth was considered limited (due to the rarity of precious metals). Nations seeking power needed to grab as much wealth as possible, often at other nations' expense.

**2\. The Need to Increase the Supply of Gold**

Gold represented wealth and power. It could pay for soldiers, seafaring exploration for natural resources, and expanding empires. It could also protect against invasion. A lack of gold meant the downfall of a nation.

**3\. The Need to Maintain a Trade Surplus**

To build wealth, nations prioritized exports and revenue while minimizing imports to avoid losing gold.

**4\. The Importance of a Large Population**

Large populations represented wealth. Increasing a nation's population was integral to supplying a labor force, supporting domestic commerce, and maintaining armies.

**5\. The Use of Colonies to Support Wealth**

Some nations needed colonies for raw materials, a labor supply, and a way to keep wealth within its control (by selling colonies the products their raw materials helped to produce). Colonies boosted a nation's ability to build wealth and enhance security.

**6\. The Use of Protectionism**

Protecting a nation's ability to build and maintain trade surpluses encompassed prohibiting colonies from trading with other nations and imposing tariffs on imported goods.

## The Historical Rise and Influence of Mercantilism

First seen in Europe during the 1500s, mercantilism was based on the idea that a nation's wealth and power were best served by increasing exports and limiting imports.

Mercantilism replaced feudalism in Western Europe. England, the center of the British Empire, had few natural resources.

To grow its wealth, England introduced [fiscal policies](https://www.investopedia.com/terms/f/fiscalpolicy.asp) that discouraged colonists from buying foreign products and created incentives to buy only British goods. For example, the Sugar Act of 1764 raised duties on foreign refined sugar and molasses imported by the colonies. This increased taxation was meant to give British sugar growers in the West Indies a monopoly on the colonial market.

Similarly, the Navigation Act of 1651 forbade foreign vessels from trading along the British coast and required colonial exports to first pass through British control before being redistributed throughout Europe.

Programs like these resulted in a favorable [balance of trade](https://www.investopedia.com/terms/b/bot.asp) that increased Great Britain's national wealth.

Under mercantilism, nations frequently engaged their military might to ensure that local markets and supply sources were protected. Mercantilists also believed that a nation's economic health could be measured by its ownership of precious metals, such as gold or silver. Their levels tended to rise with increased new home construction, increased agricultural output, and a strong merchant fleet that serviced additional markets with goods and raw materials.

### The Dynamics of French Mercantilism Under Colbert

Arguably the most influential proponent of mercantilism, French Controller General of Finance Jean-Baptiste Colbert (1619-1683) studied foreign-trade economic theories. He was uniquely positioned to execute on mercantilist ideas. A devout monarchist, Colbert called for an economic strategy that protected the French crown from a rising Dutch mercantile class.

Colbert also increased the size of the French navy, on the belief that France had to control its trade routes to increase its wealth. Although his practices ultimately proved unsuccessful, his ideas were hugely popular. Ultimately, they became overshadowed by the theory of free-market economics.

### The British Colonial Era: Mercantilism in Action

The British colonies were subject to the direct and indirect effects of mercantilist policy at home. Here are several examples:

*   **Controlled production and trade**: Mercantilism led to the adoption of far-reaching [trade restrictions](https://www.investopedia.com/articles/economics/08/tariff-trade-barrier-basics.asp), which stunted the growth and freedom of colonial businesses.
*   **The expansion of the slave trade**: Trade became triangulated between the British Empire, its colonies, and foreign markets. This fostered the development of the slave trade in many colonies, including America. The colonies provided rum, cotton, and other products demanded by African imperialists. In turn, slaves were returned to America or the West Indies and traded for sugar and molasses.
*   **Inflation and taxation**: The British government demanded that trading be conducted using gold and silver bullion, ever seeking a positive balance of trade. The colonies often had insufficient bullion left over to circulate in their own markets, so they issued [paper currency](https://www.investopedia.com/ask/answers/09/paper-money-usa.asp) to replace it. Mismanagement of printed currency resulted in inflationary periods. Additionally, since Great Britain was in a near-constant state of war, heavy taxation was needed to prop up its army and navy. The combination of taxes and inflation caused [great colonial discontent](https://www.investopedia.com/ask/answers/041615/how-did-mercantilism-affect-colonies-great-britain.asp).

### Mercantilism in Colonial America: Impact and Reactions

Supporters claimed mercantilism strengthened economies by uniting colonies' concerns with their founding countries. In theory, when British colonists created their own products and obtained others by trading with their founding nation, they remained independent from the influence of hostile nations.

Great Britain benefited from colonists' raw materials, essential for a productive manufacturing sector.

Critics of mercantilism believed the restriction on [international trade](https://www.investopedia.com/insights/what-is-international-trade/) increased expenses, because all imports, regardless of product origin, had to be shipped by British ships. This radically spiked the costs of goods for the colonists, who believed the disadvantages of this system outweighed the benefits of affiliating with Great Britain.

After a costly war with France, Britain raised taxes on colonists, leading to a boycott that cut British imports by one-third. This was followed by the Boston Tea Party in 1773, where Boston colonists disguised as Indians raided three British ships. They emptied several hundred chests of tea into the harbor to protest British taxes on tea and the monopoly granted to the East India Company. To reinforce its mercantilist control, Great Britain pushed harder against the colonies. This resulted in the Revolutionary War.

## The Role of Merchants in the Mercantile System

By the early 16th century, European financial theorists understood the importance of the merchant class in generating wealth. Cities and countries with goods to sell thrived in the late middle ages.

Consequently, many believed the state should allow its leading merchants to create exclusive government-controlled monopolies and cartels. Governments used regulations, subsidies, and (if needed) military force to protect these monopolistic corporations from domestic and foreign competition.

Citizens could invest money in mercantilist corporations in exchange for ownership and limited liability in their royal charters. These citizens were granted shares of the company profit. In essence, these were the first traded corporate stocks.

The most famous and powerful mercantilist corporations were Britain's East India Company and the [Dutch East India Company](https://www.investopedia.com/articles/07/monopoly-history.asp). For more than 250 years, the British East India Company maintained the exclusive, royally granted right to conduct trade between Britain, India, and China. Its trade routes were protected by the Royal Navy.

> **Important**
>
> Mercantilism is considered by some scholars to be a precursor to capitalism since it rationalized economic activity such as profits and losses.

## Mercantilism vs. Imperialism

Mercantilist governments manipulate a nation's economy to create favorable trade balances. Imperialism uses a combination of military force and mass immigration to foist mercantilism on less-developed regions. Military campaigns forced inhabitants to follow the dominant countries' laws. A key example of mercantilism and imperialism is Britain's establishment of the American colonies. 

## Mercantilism vs. Capitalism

Capitalism's free trade offers more affordable goods, while mercantilism limits imports and consumer choices. Fewer imports mean less competition and higher prices.

Mercantilist countries engaged in warfare frequently to control resources. Nations operating under a free-trade system prospered by engaging in mutually beneficial trade relations.

In his seminal book _The Wealth of Nations_, legendary economist [Adam Smith](https://www.investopedia.com/updates/adam-smith-economics/) argued that free trade enabled businesses to specialize in producing the goods that they could manufacture most efficiently. This led to higher productivity and greater economic growth.  

## Mercantilism Today

Today, mercantilism is deemed outdated. The disaster of World War II underscored the potential danger of nationalistic policies. It also prodded the world toward global trading and relationships as a way to combat them.

However, it is hard to escape mercantilism. For example, after the war, barriers to trade were still used to protect locally entrenched industries. The United States adopted a protectionist trade policy toward Japan and negotiated voluntary export restrictions with the Japanese government, which limited Japanese exports to the United States.

Today, Russia and China still use a mercantilist system because it partners so well with their forms of government. They have relied heavily on their ability to control foreign trade, their balance of payments, and foreign reserves. They have also sought to make their exports relatively more attractive with lower pricing.

In 2018, President Trump imposed tariffs on Chinese imports, launching a trade war that exists to this day.

## What Were the Main Beliefs of Mercantilism?

Mercantilism's original foundation included beliefs that the world had limited wealth in the form of gold and silver; that nations had to build their stores of gold at the expense of others; that colonies were important for supplying labor and trading partners; that armies and navies were crucial to protecting trade practices; and that protectionism was required to guarantee trade surpluses.

## What's the Difference Between Capitalism and Mercantilism?

One difference is the role that the state plays. Capitalism calls for a minimum of government intervention and ownership of capital, trade, and industry by private entities and individuals. Mercantilism involves state control and regulation. Capitalism is said to promote individual freedom. Mercantilism is said to suppress it.

## Is Mercantilism Still Used Today?

Yes, to some extent it exists in certain countries whose governments seek to maintain control over property ownership, trade, and the creation of wealth.

## The Bottom Line

The precursor to free trade economic theory, Mercantilism reigned supreme for three centuries. Mercantilism's theory relating to financial wealth building and state power supported the use of protectionism to increase export revenue and decrease imports. It sparked an age of exploration and colonization in an effort to secure raw materials, controllable trade partners, and a net transfer of wealth.

Mercantilism has been replaced in many parts of the world by free-trade theory and capitalism. However, it's still seen in the tariffs imposed by governments of nations seeking a fair (or unfair) balance of trade with other nations.

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