International Trade Theory : Mercantilism

MERCANTILISM INTERNATIONAL TRADETHEORY

INTENATIONAL TRADE International trade is the exchange of capital, goods, and services across international borders or territories. international trade has existed throughout history (for example Uttarapatha, Silk Road, Amber Road, salt roads), its economic, social, and political importance has been on the rise in recent centuries.05/03/2023 M V S SAI HEMANT 2

05/03/2023 M V S SAI HEMANT 3

INTERNATIONAL TRADE THEORIES

To understand the pattern in international trade, Different trade theories are postulated. Some famous trade theories are:1. Mercantilism2. Absolute Advantage Theory3. Comparative Advantage Theory4. Hecksher-Ohlin Factor endowment theory5. Product Life Cycle Theory6. New Trade Theory7. Porter’s Diamond Theory for competitive advantage


MERCANTILISM

Mercantilism recommends that a country’s best interest is to maintain a trade surplus

Mercantilism advocates government intervention to achieve a surplus in the balance of trade

Mercantilism observes trade as a zero-sum game - in which a gain by one country results in a loss by another

Mercantilism stands in contrast to the theory of free trade.


MERCANTILISM INVOLVESRestrictions on imports – tariff barriers, quotas or non-tariff barriers.Accumulation of foreign currency reserves and gold and silver reserves. (known also as bullionism) Granting of state monopolies to particular firms especially those associated with trade and shipping.Subsidies of export industries to give competitive advantage in global markets.


MERCANTILISM INVOLVESGovernment investment in research and development to maximize efficiency and capacity of domestic industry.Allowing copyright / intellectual theft from foreign companies.Limiting wages and consumption of the working classes to enable greater profits to stay with the merchant class.Control of colonies, e.g. making colonies buy from Empire country and taking control of colonies wealth.


HOW MERCANTILISM WORKS??


EXAMPLES OF MERCANTILISM

England Navigation Act of 1651 prohibited foreign vessels engaging in coastal trade.

All colonial exports to Europe had to pass through English first and be re-exported to Europe.

Under British Empire, India restricted in buying from domestic industries and were forced to import salt from the UK. Protests against this salt tax, led to ‘Salt tax’ revolt led by Gandhi.

In seventeenth Century France, the state promoted a controlled economy, with strict regulations about the economy and labour markets


EXAMPLES OF MERCANTILISM

Rise of protectionist policies following the great depression. With countries seeking to reduce imports and also reduce value of currency by leaving gold standard. Some have accused China of mercantilism due to industrial policies which have led to increase in investment and capacity, rise in FDI in China – combined with policy of undervaluation of currency. However, the extent of mercantilist policies are disputed


MODERN MERCANTILISM In the modern world, mercantilism is sometimes associated with policies, such as.

1. Undervaluation of currency e.g. government buying foreign currency assets to keep the exchange rate undervalued and make exports more competitive.

2. Government subsidy of industry for unfair advantage. China has been accused of offering too much subsidised investment for industry, leading to over supply of industries such as steel – meaning other countries struggle to compete.

3. Surge of protectionist sentiment, e.g. tariffs on imports.4. Copyright theft


MERCANTILISM : CRITICISMS

Mercantilism is a philosophy of a zero sum game

Mercantilism which stresses government regulation and monopoly tends to lead to inefficiency and corruption.

Mercantilism justified Empire building and the poverty of colonies to enrich the Empire country. Mercantilism leads to tit for tat policies – high tariffs on imports leads to retaliation.


NEO MERCANTILISM

Neo-mercantilism is a policy regime that encourages exports, discourages imports, controls capital movement, and centralizes currency decisions in the hands of a central government.


JUSTIFICATION FOR NEO MERCANTILISM

Tariffs in response to domestic subsidies. e.g. Supporters argue that since China’s steel is effectively subsidized leading to a glut in supply, it is necessary and fair to impose tariffs on imports of Chinese steel to protect domestic producers from unfair competition. US tariffs on imports of steel from China 266%. In Europe, tariffs are 13%.

Protection against dumping. If some countries have excess supply of goods, they can sell at a very low price to get rid of the surplus. But, this can make domestic firms unprofitable. Protectionism can be justified to protect against this dumping. Examples, include EEC dumping excess agricultural production on world agricultural markets and China’s dumping of steel.


JUSTIFICATION FOR NEO MERCANTILISM Infant industry argument. For countries seeking to diversify their economy, tariffs may be justified to try and develop new industries. When the industries have developed and benefit from economies of scale, then the tariffs and protectionism can be dropped.


M V S SAI HEMANTBBA FOREIGN TRADESEMESTER-5, IIIRD YEARUPES, DEHRADUNUTTARAKHAND. INDIA

International Trade Theory : Mercantilism

Economy & Finance

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