Theories of International Trade - Mercantilism

Mercantilism

This post along with others will explain the different theories of International Trade such as Mercantilism, Absolute Advantage, Comparative Advantage, Hecksher-Ohlin Theory etc.

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 17^th and the 18^th 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.

In the next post, we shall discuss the other theories of International Trade.

Theories of International Trade:

1. Mercantilism
2. Theory of Absolute Advantage
3. Theory of Comparative Advantage
4. Hecksher-Ohlin Model

International Trade Law Notes