Mercantilism Theory of International Trade

The mercantilists proposed Mercantilism theory of international trade. They were a group of economists who preceded Adam Smith. The foundations of economic thought between 1500 and 1800 were based on mercantilism. Mercantilists believed that the world had a finite store of wealth; therefore, when one country got more, other countries had less. Mercantilists restricted imports and encouraged or subsidized exports as a conscious policy to make their citizens better off. Mercantilists judged the success of trade by the size of the trade balance.

Mercantilism was a sixteenth-century economic philosophy that maintained that a country’s wealth was measured by its holdings of gold and silver. This required that the countries to maximize exports and minimize imports. The logic was transparent to sixteenth-century policy makers that if foreigners bought more goods from us than we bought from them, then the foreigners had to pay us the difference in gold and silver, enabling us to amass more treasure. With that treasure we could expand the nation’s global influence.

Politically, mercantilism is popular with many manufactures and their workers. Export-oriented manufacturers favoured mercantilist trade policies, such as those giving subsidies or tax rebates, which stimulated their sales to foreign buyers. Domestic manufacturers threatened by foreign imports endorsed mercantilist trade policies, such as those imposing tariffs or quotas, which protected them from foreign competition according to Trigg, Griffin, & Pustay.

Mercatilists pressed for favorable balance of trade (BOT) or balance of payments (BOP) as against the unfavorable one. In a way it is good because your currency appreciates with mounting surplus on the Forex front, and the country can attract more foreign capital infusion further strengthening the country’s economy, infrastructure, etc. Now China and Japan with enormous favorable BOT and BOP get all the benefits envisaged by mercantilists.

But the problem is can a country stick to continuously enormous favourable BOT and BOP forever? If every country vies for the same, there will only be autarchy(Absolute rule or power). Besides, most members of society were hurt by mercantilist policies of pampered exporters and penalized importers. Government subsidies of exports for selected industries were paid for by taxpayers. This is distortion of trade and interference in efficient allocation of resources. Actually those countries which pursued a policy of import-restriction in the end grew less. Example India, until mid 1990s. Those that ran heavy deficits grew well. Example USA, till recently.

Evaluation of Mercantilism Theory of International Trade

Mercantilist writers have been lauded and criticized in the literature on foreign trade at least since Hume’s Political Discourses in 1752. Mercantilists have been criticized for everything from their views regarding the gains from trade to their self-promotion of the merchant’s role in society as being important. Mercantilist writers assumed that the economy will generally operate at a pace that leaves resources —land and labor — idle, but in reality the economy naturally tends to full employment. This is a “flaw” in the logical foundation of mercantilist thought. The regime of WTO has moved the world away from mercantilism by pressing for free trade with reduced protectionism.

Theory of Neo-Mercantilism

Mercantilism is still in vogue. Mercantilist policies are politically attractive to some firms and their workers, as mercantilism benefits certain members of society. Modern supporters of these policies are known as neo-mercantilists, or protectionists. The neo-mercantilists want higher production through full employment and that every industry produces an exportable surplus leading to favorable BOT. Consciously or otherwise, every country is concerned about increasing export earnings. The merits of surging Forex surplus built through exports speaks well of a country’s capability to cater to world’s needs qualitatively, quantitatively and in varied product/service ranges. Every country does what is possible to meet this end. But the modern trade emphasis is ‘Export more and Import more’.

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