Unit- 2- Lecture-1 (Mercantilism)

Unit- 2- Lecture-1 (Mercantilism)

1. Branch - MBA International Business Management DR. APJ ABDUL KALAM TECHNICAL UNIVERSITY By Dr. B. B.Tiwari Professor Department of Management Shri Ramswaroop Memorial Group of Professional Colleges, Lucknow Unit-2: Lecture – 1 International Trade Theories: Mercantilism

2. Mercantilism: Introduction ADAM SMITH coined the term “mercantile system” to describe the system of political economy that sought to enrich the country by restraining imports and encouraging exports. This system dominated Western European economic thought and policies, including Portugal, France, Spain, and Great Britain from the sixteenth to the late eighteenth centuries. Its use was favored by writers such as Jean- Baptiste Colbert, who at a time served as the French Finance Minister.

3. Economist : Jean- Baptiste Colbert's work in seventeenth century France exemplified classical mercantilism. In the English-speaking world its ideas were criticized by Adam Smith with the publication of The Wealth of Nations in 1776. Later David Ricardo also criticized with his explanation of comparative advantage,

4. Mercantilism in terms of Trading : This approach assumes the wealth of a nation depends primarily on the possession of precious metals such as gold and silver. During 16th to 18th century, gold and silver were the currency of trade between countries. By exporting goods, countries could earn and therefore maximize the amount of gold and silver. Conversely, importing goods from other countries resulted in an outflow of gold and silver to those countries.

5. Features of a Mercantilist Economy: Import prohibition of certain goods using imposition of high tariffs, government legislation or very high taxes/import duties. A wide range of government subsidies on export industries to promote the country’s export-based policy. Policies of nationalism. Accumulation of assets in gold and silver, and prohibition of private accumulation, use or export of these items. One-way trade with colonies, and importation of gold and raw materials from these sources.

6. Mercantilist policies have included: Forbidding trade to be carried in foreign ships; Export subsidies Banning all export of gold and silver; Promoting manufacturing with research or direct subsidies; Limiting wages; Maximizing the use of domestic resources. High tariffs, especially on manufactured goods; Exclusive trade with colonies

7. Assumptions: Three Assumptions of Mercantilism: There is a finite amount of wealth in the world. A nation can only grow rich at the expense of other nations. Therefore, a nation should try to achieve and maintain a favorable trade balance, exporting more than it imports.

8. Colonies for Favorable Trade Balance: The economy of the colonies is always secondary to the economy of the mother country. The colonies should provide cheap raw materials to the mother country and market the manufactured goods of the mother country. In return, the mother country provides military security and political administration to the colonies. The overriding goal is national monopoly, meaning that a nation’s colonies should be restricted to trading only with each other or with the mother country.

9. 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 market

10. MODERN MERCANTILISM In the modern world, mercantilism is sometimes associated with policies, such as. Undervaluation of currency e.g. government buying foreign currency assets to keep the exchange rate undervalued and make exports more competitive. Government subsidy of industry for unfair advantage. China has been accused of offering too much subsidized investment for industry, leading to over supply of industries such as steel – meaning other countries struggle to compete. Surge of protectionist sentiment, e.g. tariffs on imports

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