Theories of International Trade are simply the theories that explain the concept of exchanging

goods and services between two people or entities in different countries. There are different
theories of International Trade. The older ones are termed as the Traditional Theories whereas
the new ones are called as the Modern theories. Let us start with the traditional theories first. The
first theory in this respect is that of ‘Mercantilism’.

Mercantilism

This theory was developed in the sixteenth century and is considered to be the oldest theory of
International Trade. According to this theory, a country’s wealth could be determined by the
amount of its gold and silver holdings. This group of theorists believed that every country
should increase its gold and silver holdings by increasing its exports and reducing imports. During
that point of time, gold and silver had the status of currency. The countries should focus on having
a ‘trade surplus’ i.e. value of exports should be greater than the value of imports. ‘Trade deficit’
is to be avoided.

It was Adam Smith who coined the term ‘Mercantile System’. Under such a system, the
economies try to enrich the wealth of the nation by restraining imports and encouraging
exports. Adam Smith was also the one who heavily criticized this theory. He argued that free
trade benefits both the parties i.e. the exporter and the importer. He also argued that ‘Mercantile
System’ proved harmful to the population in general as the consumers received the goods at a
higher price.

This theory flourished during the 17th and the 18th century as imperialism was being promoted
by colonial empires. The countries used raw materials to manufacture goods and sell them,
thereby promoting exports. However, advocates of ‘free trade’ believe that mercantilism
promoted protectionism. Import restrictions were imposed by countries that ultimately led to
higher prices and severely affected the consumers. The biggest promoters of this theory
were British, Dutch and Spanish Empires.
Even today this theory is being followed to some extent by export economies like Germany,
Japan, and Singapore etc. Some have dubbed the policy of these countries to be a kind of neo-
mercantilism.