International Economics CHP 03 Trade Theories I 39886 649

FACULTY OF ECONOMICS
Kardan University
International
Economics
Chapter 3: International Trade Theories
Mercantilism
Ahsanullah Mohsen M.Sc.

a.mohsen@Kardan.edu.af
Ahsanullah.Mohsen@rub.de
Kardan.edu.af
The basic questions of international trade

1. What is the basis of trade?
Two answers to this question will be discussed in coming
chapters: Absolute Advantage and Comparative Advantage
2. What are the gains from trade?
– Presumably (and as in the case of an individual), a nation will
voluntarily engage in trade only if it benefits from trade. But how
are gains from trade generated
– How large are the gains and how are they divided among the
trading nations
2
The pattern of trade

– That is, what commodities are traded and which
commodities are exported and imported by each
nation.
– The models of Absolute and Comparative
Advantage show that the gains from trade are
increased consumption gained through
specialization in production and trade.
3
Mercantilism
Defining mercantilism …
The theory that a country should accumulate financial wealth by
gathering as many inflows of “currency” as possible
Mercantilism is an economic practice by which

governments used their economies to increase state power
at the expense of other countries. Governments sought to
ensure that exports exceeded imports and to accumulate
wealth in the form of bullion (mostly gold and silver).
Mercantilism
• A system of government institutions and
policies designed to restrict international trade
• Maximize exports through subsidies.

• Minimize imports through tariffs and quotas
• The theory therefore says that a country should

always have a trade surplus.
Mercantilism: 16th – late 18th century

• A nation’s wealth depends on accumulated treasure
• Gold and silver are the currency of trade
• Two means of increasing a country’s wealth are

colonialism and international trade.
Major Tenets (beliefs) of Mercantilism

1. Gold and silver are most desirable forms of wealth
2. Accumulating these requires a trade surplus
3. Implies a nationalistic view
4. Import raw materials, protect with tariffs against the importation of
any goods that can be produced domestically. Restrict export of raw
materials.
5. Colonization. Keep colonies dependent.
6. Oppose internal taxes of any kind.
7. Strong central government
8. Large, hard-working labor force is critical
Mercantilism:
Policies
1. Forbidding colonies to trade with other
nations
2. Monopolizing markets with main ports;
3. Forbidding trade to be carried in foreign ships;
4. Maximizing the use of domestic resources;
5. Also restricting domestic consumption
with non-tariff barriers to trade (imported
goods).
Mercantilism – 9-point plan
1. Every inch of a country's soil be utilized for agriculture, mining or manufacturing.
2. That all raw materials found in a country be used in domestic manufacture, since
finished goods have a higher value than raw materials.
3. A large, working population be encouraged.
4. That all export of gold and silver be prohibited and all domestic money be kept in
circulation.
5. Imports of foreign goods be discouraged.
6. If imports are indispensable they be obtained in exchange for other domestic goods
instead of gold and silver.
7. Imports be restricted to raw materials that can be finished [in the home country].
8. That opportunities be constantly sought for selling a country's surplus manufactures
to foreigners, so far as necessary, for gold and silver.
9. That no importation be allowed if such goods are sufficiently and suitably supplied at
home.
Characteristics of Mercantilism
1. “Bullionism”  the economic health of a nation could be
measured by the amount of precious metal [gold or silver]
which it possessed.
• ‘Hard’ money was the source of prosperity, prestige, and strength

for a nation.
• Bullionism dictated a “favorable balance of trade.”
• Export more than you import [a trade surplus].
 High tariffs on imported manufactured good.
 Low tariffs on imported raw materials.
Characteristics of Mercantilism…
2. Each nation must try to achieve economic self-sufficiency.
• Those founding new industries should be rewarded by the state.
3. Thriving (succeed) agriculture should be carefully encouraged.
• Less of need to import foods.
• Prosperous farmers could provide a base for taxation.
• Cultivate more to exceed supply for surplus, prices will decrease and
labor will be cheaper.
12
4. Sea power was necessary to control foreign
markets.
• Less need to use the ships of other nations to carry
your trade goods.
• Your own fleet (navy) adds to the power and prestige
of the nation.
5. Impose internal taxes of all kinds.
• Tax on Income, consumption and savings
• Negative tax on Investments
13
6. Colonies would provide captive (locked up)
markets for manufactured goods & sources of
raw materials.
Manufactured goods
Mother
Country
Colony
Raw materials
Cheap labor
7. Trade is a “zero-sum” game.
• A nation can gain in international trade only at the
expense of other nations.
• Its is not bilateral gains, Win - Lose
8. A large population was needed to provide a
domestic labor force to people the colonies.
9. Luxury items should be avoided

• They took money out of the economy unnecessarily.
15
10. State action was needed to regulate and enforce
all of these economic policies.
• State-sponsored trade monopolies.
• Zero tariffs on Imports of raw material, but
• High tariffs on the exports of raw materials.
• High tariffs on imports of final goods
• Zero tariffs on the export of final goods.
• Inflow of population welcomed.
16
Jean Baptiste Colbert [(1619-1683)

• Architect of French
mercantilism or “Colbertism.”
• He was a bullionist.
• There are four professions of
importance to the nation:
• Agriculture
• Trade
• Army
• Navy
• Uniform weights & measures.
• Opposed tolls on internal trade.
Jean Baptiste Colbert [(1619-1683)

• Supported mandatory
labor on national roads.
• Favored a large
population.
• Father of 10 or more
children would be exempt
from taxes.
• Favored low wages and Colbert & Louis XIV
child labor.
Who Benefited Most From Mercantilism?

• Monarchs (King).
• Merchant capitalists.
• Joint-stock companies.
• Government officials.
Validity in its time

• The growth of commerce was/is constrained by liquidity
• Needed money for wars
• Increased supply of money makes tax collection easier
• Reduces interest rates, making borrowing and expansion
of capital stock easier and cheaper
Lasting contributions
• Influenced attitudes toward merchants
• Promoted nationalism
• Increased the role of chartered (rented) trading companies
• (Several East Asian countries today employ mercantilist policies)
Mercantilism: Flaws
(weaknesses)
• Damaged economic growth
• Ignores living standards
• Ignores human development
Mercantilism is Alive
• Although most nations claim to be in favor of free
trade, Most of them continue to impose many
restrictions
• Most industrial nations restrict imports of
agricultural commodities, textiles, shoes, steel, and
many other products.
• In order to protect domestic employment
• They also provide subsidies to some of their hi-tech

industries, such as computers and telecommunications,
which is deemed essential for the international
competitiveness of the nation and its future growth.
• Developing countries are even more protective of
domestic industries.
• This is evidenced by the numerous trade disputes that
have arisen over time, WTO.
For Example
• EU preferences for banana imports from African
countries at the expense of bananas from Central
American plantations.
• EU subsidies to Airbus Industry for the development
of its new super-jumbo jet that takes sales away from
Boeing’s 747.
• the tax refunds that the U.S. government was
providing some exporters; and on the U.S. tariffs on
imported steel.
To Conclude
• Indeed, the list of protected products is long and
varied.
• Trade restrictions are demanded to protect domestic
jobs from foreign competition
• And to encourage domestic high-tech industries
• Mercantilism, though declining, is alive and well in the
twenty-first century.
Thanks

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FACULTY OF ECONOMICS

Ahsanullah Mohsen M.Sc.

The basic questions of international trade

The pattern of trade

Mercantilism is an economic practice by which

• Maximize exports through subsidies.

• The theory therefore says that a country should

Mercantilism: 16th – late 18th century

• Two means of increasing a country’s wealth are

Major Tenets (beliefs) of Mercantilism

• ‘Hard’ money was the source of prosperity, prestige, and strength

9. Luxury items should be avoided

Jean Baptiste Colbert [(1619-1683)

Jean Baptiste Colbert [(1619-1683)

Who Benefited Most From Mercantilism?

Validity in its time

• They also provide subsidies to some of their hi-tech

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