Mercantilism, the first theory of international trade emerged in England in the middle of 16th century, formed the backbone of economic thought from 1500-1800 AD. The basic premise or philosophy of this theory is that a country would be stronger if its exports exceeded imports. In the process, the country would accumulate gold and silver, the basis of power and wealth.
Consistent with this philosophy, government subsidised exports and put barriers to imports. The mercantilists were interested in a surplus in balance of trade, than maximisation of trade. Some colonialist countries used their colonies to support this objective.
Colonies were used as source of raw materials and markets for finished products. The industrial structure of colonies was broken so that markets for export goods can be there. This kind of exploitation was one cause of American Revolution and demand for freedom by other colonies.
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The key mistake or inherent inconsistency in mercantilist thinking was the belief that trade as a zero- sum game or win-lose sport. It means that one nation’s gain is loss for another. Running a favourable balance of trade for a long time is also not favourable.
Due to surplus gold and silver reserves would increase, leading to increase in money supply and thereby lead to inflation. Reverse will be the process for unfavorable surplus nation. Thus, to think that trade surplus will go on forever is a mistake. Despite the conclusion, the mercantilism is by no means dead. Even in 21st Century, nations liberalize in the areas they have competitive advantage and resist wherein they are less competitive.
‘Trade is the name of the game of a win-win situation. It is not a football game, where both try to score over other; but a dance, where everyone tries to be in synchronisation.’
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Recently, the term neo-mercantilism has been coined. The term describes the approach of having favourable trade balance to achieve social and political objective(s). A nation may produce more than the domestic demand and the home government may grant aid or loan to other country to exercise political influence over that country.