Fundamental Theories of International Trade Development
Mercantilism: The Essence, the Significance and Limitations
The modern theories of international trade have a rich history. For a long time, started from the emergence of economic science by itself (the beginning of the 17th century) scientists have tried to answer the following key questions:
• Why does international trade exist and what are its economic basis?
• How much profitable is the trade for each of the participating countries?
• What is it necessary to choose for economic growth: free trade or protectionism?
Mercantilism was the first one, which proposed the theoretical understanding of these questions. It is a doctrine, where the existing world was considered in a static and the wealth of nations was considered as a fixed phenomenon in every moment. Therefore, its adherents (T. Man, A. Serra, A. Montchrestien) believed that the welfare of one country is possible by means of redistribution of the existing wealth, i.e. through the pauperization of another country. Mercantilists associated the wealth with stocks of precious metals (gold and silver). In their opinion, the larger number of precious metals a country owns, the richer it is. Also, from their point of view, having more money in circulation stimulates the development of national production and the employment increase. A state, according to mercantilists, should:
• stimulate exports and export more goods than import. This approach will provide the gold inflow;
• restrict the importation of goods, especially luxury goods that will provide export balance of trade;
• forbid the production of the final products in its colonies;
• forbid the exportation of raw materials from the parent states to the colonies and allow free importation of raw materials, which are not obtained within the country;
• stimulate an export of mainly cheap raw commodities from the colonies;
• forbid any trade of its colonies with other countries, except the parent state, which can resell the colonial goods abroad by itself.
Thus, the mercantilist policy of major countries was based on striving for maximum accumulation of money capital and maximum reduction of import, i.e. a state should sell to the foreign market as many goods as possible and should purchase as little as possible. Meanwhile, the country should accumulate gold. Mercantilists also felt the need to perform the governmental control over all economic activities and so justified the economic nationalism.
The importance of mercantilism is in the following statements:
1. For the first time, there was made an attempt to create a theory of international trade, which directly linked trade relations with the domestic economic development of a country and with its economic growth.
2. Mercantilists worked out one of possible models for the development of international trade on the basis of commodity character of production. They laid the foundations of categorical apparatus used in modern theories of international trade.
3. There were laid the foundations of what in the modern economy is called the balance of payments.
However, mercantilists could not understand that the enrichment of one country could be carried out not only by means of pauperization of other ones it trades with, that the economic growth is possible not only as a result of redistribution of existing wealth, but also by means of its accumulation. In other words, they believed that a country could have benefit from trade only at the expense of another country that makes trade a zero-sum game.
Nowadays, neomercantilism appears to be when the countries with high rates of unemployment try to limit import in order to stimulate domestic production and employment.
Mercantilism school dominated in economy during 1.5 century. By the beginning of the 18th century international trade had a huge number of possible restrictions. The rules of trade were contrary to the needs of production, and there was a need for a transition to free trade.
The theory of international trade found its next development in the writings of economists of the classical school.