Курсовая: Protectionnism and Free Trade in Economical Doctrines
The theoretical basis of a study of international economic relations in its
modern form was formed as a result of a long and difficult process, full of
successes but, nevertheless, with important mistakes.
The early roots are to be found, perhaps, in Antic Greece in the works of
Aristotel, Platon and Xenophon. In general, the antic philosophers opposed to
the big commerce, supporting the idea of a closed domestic economy. The closed
character of the production of a self-supply type, dominating from the
antiquity up to 15th century gave no incentives for developing any profound and
constant studies on international trade. In these conditions is in no way
occasional that the theorists of antiquity and Middle Ages (scholastics)
exaggerated the role of production (especially agricultural) and pleaded
against the "art of making money", the chrematistics (after Aristotel).
At the dawn of the Modern Age (16th century) there appeared the first trials
of more systematic analyses of the international economic relations.
Developed during the period of the downfall of feudalism and the transition
to capitalism, the mercantile theory was the first trial to explain
integrally the principles of international trade in a paradigm of the
analysis of economic reality.
Perhaps, the field of international trade was first closely studied by men of
affaires, in private or governmental employment, as no other topical area, as a
part of an effort to increase the wealth and the power of the nation, with
which these men tended to identify their own welfare. This body of doctrines,
later named by Adam Smith the "mercantile system" or "mercantilism", insisted
that the acquisition of wealth, particularly wealth in the form of gold, was of
paramount importance for national policy. Mercantilists took the virtues of
gold almost as an article of faith; consequently, they never undertook to
explain adequately why the pursuit of gold deserved such a high priority in
their economic plans.
The mercantilists held that economic policy should be nationalistic and aim
to secure the wealth and power of the state. This concept was based on the
conviction that national interests are inevitably in conflict - that one nation
can increase its trade only at the expense of other nations.
Thus the most pervasive and most emphasized doctrine was the importance of
bringing about and maintaining an excess of exports over imports, for that was
the only way for a country without gold and silver mines to increase its stock
of the precious metals. In this way the foreign trade, after mercantilists, was
reduced to the maximum exports of goods for gold and silver and some exports of
raw materials and precious metals.
The desire for a "favorable" balance of trade was never based by mercantilist
writers on a to see their countries engaged in capital export, to make
investments abroad, as the majority of them were at least confused as to the
difference between money and wealth, and very often identified these two terms.
The idea was also that the state should provide its citizens with a monopoly
of the resources and trade outlets of its colonies. A typical illustration of
the mercantilist spirit is the famous English Navigation Act of 1651, which
reserved for the home country the right to trade with the colonies and
prohibited the import of goods of non-European origin unless transported in
ships flying the English flag. This law lingered on until 1849. A similar
policy was followed in France.
Thomas Mun, as a representative of mercantilist school, was one of the firsts
to deal extensively with the balance of international trade and the balance of
international payments. He first introduced into this balance such components
as the sale of numerous services - freight earnings, marine insurance payments,
travelers' expenses, and many more - to foreign countries.
Among other adepts of mercantilist theory we can name also Edward Misselden,
William Petty, and others.
With the emergence of mercantilism in the 16th-17th century, an extensive
body of literature dealing with the international trade appeared, although we
must add immediately that it yielded relatively few lasting contributions to
international trade theory.
Mercantilists' ideas often were intellectually shallow, and indeed their
trade policy may have been little more than rationalization of the interests of
rising merchant class that wanted wider markets coupled with protection against
competition in the form of imported goods.
A strong reaction against mercantilist attitudes began to take shape toward
the middle of the 18th century. In France, the economists known as Physiocrats
demanded liberty of production and trade. In England, Adam Smith demonstrated
in his The Wealth of Nations (1776) the advantages of removing trade
restrictions. Economists and businessmen voiced their opposition to excessively
high and often prohibitive customs duties and urged the negotiation of trade
agreements with foreign powers.
This movement was later named liberalism and the very first economists
fighting against the mercantile ideas are regarded to as the pre-classical
18th century is often remarked through the development of the scientific
trend in studying human society. In this way through the association with such
sciences as physics, medicine, astronomy, and others, it was proved that the
society is ridden by the "natural law". Instead of being finalistic and
normative, as in the Middle Ages, the human sciences became descriptive and
explanatory. One of the first scientists which tried to follow these concepts
are the pre-classical liberalists and among them such economists as Dudley
(Douglas) North, Cantillon, Hume, Condillac, and others.
North undertook a vigurous attack aimed at ridding the discussion of foreign
trade matters from mercantilist "superstitions". He has fittingly been called
the first "free trader" in the Smithian sense. Viewing the whole world rather
than a single nation as an economic unit, he demonstrated that there's no
fundamental difference between foreign and domestic trade. North also presented
a concise formulation of the automatic and self-regulating mechanism that
provides a nation with that sum of money required for carrying its trade.
Cantillon deflated mercantilist tenets by showing that if a country continues
to sell more than it buys from abroad, money will successively will flow into
it and, as a first consequence, land and labor in the export-surplus country
will become more expensive.
Hume greatly helped to piece together the theory of self-regulating
international trade, and he went beyond Cantillon in pointing out why a country
could not permanently have a "favorable" or "unfavorable" trade balance.
Specifically, he stated the theory of self-regulating mechanism with a much
greater degree of clarity and incorporated it more consistently with the
remainder of his work than was the case with any of the earlier or contemporary
writers. He included the influence of exchange-rate fluctuations on commodity
trade in the mechanism as an additional equilibrating factor. Hume considered
that the exchange rate equilibrates the trade balance of the country; this
meaning that it grows, if the trade balance tends to the unfavorable one and in
this way presses the imports, and vice-versa.
Condillac applied his utility theory to international trade and demonstrated
that what holds true for exchange between two persons is largely applicable
also to commerce between nations. The inequality of subjunctive valuations he
saw reflected, on a larger scale, in the total exchange transactions between
nations. He decried the foolishness of establishing trade barriers because it
is in the very nature of exchange that both parties will benefit - what is
offered for sale always being valued less highly than what is acquired in
return. If each nation insisted on selling only, they would all eventually wind
up without foreign trade and deprive themselves of its benefits. Condillac went
beyond his predecessors Hume and Cantillon in showing that even if other
nations continue putting up obstacles to international exchange, it will be
advantageous for a particular country to adhere to free-trade principles. He
concludes, somewhat optimistically, that when trading enjoys complete and
permanent liberty, wealth is bound to spread everywhere.
Classical liberalistic school gave us three models of international trade:
Ø the physiocratic model
Ø the absolute advantage theory
Ø the theory of comparative advantage
The mercantile policies imposed in the 16th - 17th century, which proclaimed
the accumulation of wealth through trade, in the form of money capital, had
ridden the most of European countries (maybe except Germany and, in some
measure, Britain) into a state of a downfall of production, especially of
Gradually there appeares the idea that the wealth consists of goods. In this
sense, physiocrats can be considered the pioneers. Supporting that the wealth
is the totality of agricultural goods, physiocrats leave money the role of a
means of exchange only.
In these conditions, the new conception about the international trade
appears. Once the wealth derives from agriculture, it is not created by trade,
therefore the trade must be based only on the exchange of equivalents, while
money are no more than a means of exchange.
The physiocrats oppose to the active ("favourable") balance, as it results
from the export of wealth (in the form of goods), and the import of money
(which are not wealth). They fight to realise an equilibrated balance in
The founder of the Physiocratic School, Quesnay, in all probability heavily
indebted to Cantillon, brought out the fact that the state of the balance of
trade between nations is neither an indicator of the advantages of foreign
commerce nor that of the wealth of nations. But he was the author of theory
which contained the idea that when a country imports luxury goods, selling the
most necessary or most useful commodities, it prospers, because it means that
the people are able to produce beyond its basic requirements.
The Absolute Advantage Theory
The British school of "classical economics" began in no small measure as a
reaction against the inconsistencies of mercantilist thought. Adam Smith was
the 18th-century founder of this school; his famous work, "The Wealth of
Nations", is in part an anti-mercantilist tract. In "The Wealth of Nations",
Smith emphasized the importance of specialization: in a world where the
productive resources are scarce and human wants cannot be completely satisfied,
each nation should specialize in the production of goods it is particularly
well equipped to produce; it should export part of this production, taking in
exchange other goods that it cannot so easily turn out.
Adam Smith's attack was probably the boldest one on the "mercantile system"
which was already tottering both because economic changes had given some of
these doctrines an antiquarian flavor and because the piecemeal invalidations
of these doctrines by the many forerunners of economic liberalism hardly left
it a "leg to stand on". All the same, without Smith's vigurous, forceful, and
systematic statement of its weaknesses, it might have lingered much longer than
On the other hand, Smith was unfortunately not capable of precisely
formulating a general theory of international trade. Apart from his building up
an imposing structure of arguments in favor of freedom from restrictions on
foreign trade activities, his contributions to this theory are relatively
minor, as Smith considered mistaken that a producer needs an absolute advantage
to export its products.
The basic concepts of Smith's teory of international trade may be considered
1. The international commerce is close related with the social division of
2. The international trade after Smith is based apon the freedom of action
and the incentives of economic agents.
3. In international trade the competition is free and perfect (without
monopolies and any governmental restrictions in the form of protectionist
From these concepts the following indications on international economic
1. In the result of labor division it is not necessary and even possible that
every country produce inside all the products it needs. It is because different
states are provided with the factors of production of different types and
quality in different proportions. As the result every country must specialize
in production of that goods, for which the costs of production are the lowest.
2. Every country imports the goods for which it pays a lower price than it
would cost him in case it produced this product domestically.
3. The difference between the domestic cost of production and the import
price is the absolute advantage obtained through the international trade, this
rule being general for all countries.
4. At the domestic range the state must not interfere in economy, as it
always disturbs economic agents from seeking the most efficient mode to invest
factors of production it posesses.
5. In the international trade must be promoted the policy of free competition
(without monopolies) and a policy of free exchange (non-discriminating).
Much as Smith was aware of the benifits of free trade and was able to
influence the British economic thought, he was not an unqualified free trader.
He singled out two primary cases which in his view justified the imposition of
barriers on imports for the purpose of encouraging domestic industry.
First, some particular industries may be necessary for the defense of a
country. From this point of view, the British Navigation Acts, inasmuch as they
promoted the building up of a merchant marine to be used in peace and war
alike, were perfectly sensible.
The second case is an application of the principle that normally competitive
conditions should not be distorted by government intervention. Consequently, it
will be proper to place a burden on foreign industry if this merely neutralizes
the disadvantage under which domestic industry operates because it is burned
with some taxes from which the foreign producers are exempt. After the
imposition of a "matching" tariff duty, a form of equalizing adjustment no
larger portion of domestic labor and capital would be devoted to the particular
domestic industry of a country than what would naturally go to it. "It would
only hinder any part of what would naturally go to it from being turned away by
the tax, into a less natural direction..." Smith does not underrate the
difficulty arising from the fact that imported commodities are seldom perfect
equivalents of the domestic produced variety.
Adam Smith took up two secondary cases in which he held it to be a "matter of
deliberation" whether or not to follow a laissez-faire policy.
The first deals with the advisability, pro and con, of imposing a retaliatory
duty designed to bring about the repeal of a duty imposed by a foreign country.
The success of taking such a step, Smith holds, will always be open to guess;
and unless the odds are distinstly in its favor, the "...transitory
inconviniency of paying dearer during a short time for some sorts of goods"
would not be justified.
The second possibility, where the issue is not the imposition of a new tax
but rather the return to free trade from the evils of protection, centers
around the need of preventing a sudden painful shock to a domestic industry.
This will be largely a question of size: only when a "great multitude of hands"
would all at once be deprived of their ordinary employment and livelihood by
the removal of high duties and prohibitions in some special regard to their
welfare in order. Indeed, Smith feels, it becomes a matter of equity in this
case that the return to exposure to competition from foreigners be undertaken
"...slowly, gradually, and after a very long warning".
Bounties on exports, that is, government payments to exporters of goods who
could not otherwise effectively compete with their foreign rivals, were, as we
might expect, another device of the "mercantile system" scorned by Smith. They
can only warp the natural allocation of resources. Since a country cannot force
the buying of its exports on other countries, the next best expedient may be
found in one country paying another for the buying of exports. But doing so,
through bounties, will force a country's trade in less advantageous channels
than that in which it would go if left alone. Domestic consumers will be the
losers: under conditions of full employment they would pay a higher price for a
smaller portion of the total supply, and in addition they would have to foot
the bill for government payments to exporters.
Such are the highlights of the attack on the absurdities of mercantilist
restrictions, which had flowered too long to suit Smith's disposition.
The Comparative Advantage Theory
Smith did not expand these ideas at much length; but David Ricardo, the
second great classical economist, developed them into the "principle of
comparative advantage", a principle still to be found, much as Ricardo
spelled it out, in every textbook on international trade.
The principle of comparative advantage is based on what kind of product the
country can produce best, in comparing not with other countries, but with the
producing of other kinds of goods. In this case the country doesn't necessarily
need an absolute advantage to specialize in producing and exporting it.
The major purpose of the theory of comparative advantage is to illustrate the
gains from the international trade. Each country can gain by specializing in
those occupations in which it is relatively efficient; it should export part of
that production and take in exchange those goods in whose production it is, for
whatever reason, at a comparative disadvantage. The theory of comparative
advantage thus provides a strong argument for free trade - and indeed - for a
laissez-faire attitude with respect to trade.
The supporting argument is simple; specialization and free exchange among
nations yield higher real income for the participants.
The act that a country will enjoy higher real income as a consequence of the
opening up of trade barriers does not mean, of course, that every family or
individual within a country must share in that benifit. Producer groups
affected by import competition obviously will suffer to at least some degree.
Comparative-advantage theorists concede that free trade would affect the
relative income position of such groups, and perhaps even their absolute income
level. But they insist that the special interests of these groups clashes with
the total national interest, and the most that they are usually willing to
concede is the possible need for a temporary protection against import
competition, in order that the persons affected may have sufficient time to
move to another occupation.
In his theoretical researches D.Ricardo did not base apon extensive empirical
researches but mainly engaged in abstract reasoning. In working out his
international trade theory, he also founded his conclusions apon a set of
postulates which he considered as first approximations of the real world. The
conclusions he drew, being valid within the framework of his assumptions only,
had of course to be modified before they could be applied to actual
The same is also true for Jean-Stuart Mill, whose studies in international
trade theory completed the framework built by Ricardo. In spite of many attacks
and emandations, the main structure of the Ricardo-Mill theory of international
trade remained basically unimpared untill well into the 20th century.
He left however, much unfinished business for his successors, since his
statements did not explain how the actual ratios of international exchange
determine international prices.
Ricardo has been attacked on many grounds: his statement of the doctrine in
terms of labor costs only; his assumption of constant cost of production;
and, of course, his artificial assumptions of perfect factor mobility within
a nation as against complete factor immobility internationally. Many feel
that these demerits are minor and are overshadowed by the fact that his new
approach opened up entirely new vistas for further research, for example, a
restatement of the principle in terms of opportunity costs.
John Stuart Mill
Ricardo's contribution left unanswered the question of how the actual ratios
at which goods exchange are determined. It was Jean Stuart Mill who explained
the determination of the terms of trade and did so with great skill. He found
that they are dependent on reciprocal demand and that the equilibrum exchange
ratio is the ratio that equalizes the values of exports and imports for each
country in a two-country two-commodity situation. With the "Equation of
International Demand" as a tool, he proceeded to envisage more complicated
situations and explain what modifications in assumptions their analysis
necessitated. His work helped greatly in clarifying the intricate problems
connected with the theory of international values and strengthened the
foundations on which others could build.
Among the other representatives of classical school we can pick up such
economists as Nassau William, Senior, John Elliot Cairness, the Irish one
Charles Francis Bastable, whose apport in developing theory of international
trade was, perhaps, the boldest, as they tried to modify the Ricardo-Mill
theory in more realistic way.
This change of attitudes led to the signing of a number of agreements
embodying the new ideas, among them the Anglo-French Treaty of 1786, which
ended what had been an economic war between the two countries.
After Adam Smith, the basic tenets of mercantilism were no longer considered
defensible. This did not, however, mean that nations abandoned all mercantilist
policies. Restrictive economic policies were now justified by the claim that,
up to a certain point, the government should keep foreign merchandise off the
domestic market in order to shelter national production from outside
competition. To this end, customs levies were introduced in increasing number,
replacing outright bans on imports, which became less and less frequent.
In the middle of the 19th century, customs walls effectively sheltered many
national economies from outside competition. The French tariff of 1860, for
example, charged extremely high prices on British products: 60 percent on
politique economique ig iron; 40 to 50 percent on machinery; and 600 to 800
percent on woolen blankets. Transport costs between the two countries
provided further protection.
A triumph for liberal ideas was the Anglo-French trade agreement of 1860,
which provided that French protective duties were to be reduced to a maximum of
25 percent within five years, with free entry of all French products except
wine into Britain. This agreement was followed by other European trade pacts.
Resurgence of Protectionism
In the period of a whole triumph of the doctrine of classical economic
liberalism, in the first part of 19th century, there appears in Germany a
diametrically contraire (at least apparently) doctrine of economic
protectionism. The brightest representative of this new theory is, no doubt,
Friedrich List (1789-1846), son of a German leatherworker. Not studying at any
university, he made an academic career to become active in German politics. In
1819, he became leader of the General Association of Manufacturers &
Merchants and the very soul of the movement to confederate the German states.
Being controversed and pressed in course of his life, list was in no smaller
measure appreciated and valued posthumously. Rare economists had such a great
influence upon the course of economic events as List had, there are few systems
of economic thought which were to such extend using in practice as the Listien
The economic and political unity that characterized much of Europe in the
first half of 19th century was totally absent from Germany. The peace treaty
that ended Germany's participation in Napoleonic wars left that country divided
into 39 different states, most of which were individual monarchies economically
and politically isolated from one another. Such isolation was primarily the
result of a complex system of interstate tariffs that impaired the free and
easy exchange of goods. At the same time, however, no import duties existed.
Thus British surplus products (and those of other countries) found their way
into German markets, where they were offered at extremely low prices.
Under these circumstances the very existence of German manufacturing and
mercantile interests was threatened, and by the 1830, there arose among the
German states a general clamor for economic unity and uniform tariffs. It was
this movement that consumed List's interests and energy.
In his analysis of national systems of political economy, List applied a
method of inquiry originated by Saint-Simon: the idea that an economy must pass
through successive stages before it reaches a "mature" state. The historical
stages of development detailed by List were:
Like Sismondi and Saint-Simon, List was as much interested in transition
between stages of economic development as in the end result. He felt that
passage through the first three stages will be brought about most speedily by
free trade between states and nations, but that economies in transition between
the last two stages required economic protection until the final stage was
Free trade justified once again, however, when the final stage of development
was attained, "in order to guard against retrogression and indolence by the
nation's manufacturers and merchants".
By List's classification and testimony, only Great Britain had attained the
final stage of economic development. While the Continental and American nations
struggled to reach this apogee, however, cheap British imports were thwarting
the development of domestic manufacturing. List felt that until all nations
reached the final stage of development, international competition could not
exist on an equal footing. Thus he favored protective tariffs for Germany
until its greatest national economic power was attained.
It is important to note that List was not an outright protectionist; rather,
he felt that protection was warranted only at critical stages in history. His
writings are replete with examples borrowed from history and experience showing
that economic protection is the only way for an emerging nation to establish
itself. List felt that the American experience offered vindication of his
views, and he of course found ready support among United States protectionists,
particularly Alexander Hamilton and Henry Carey.
List's Criticism of Classical Economics
List strongly opposed the absolutist, cosmopolitian tendencies of the
classical economists. They derived principles, he maintained, which were then
assumed to hold for all nations and all times. By contrast, List's theory and
methodology were strongly nationalistic and historical. His theory of stages in
economic development, for example, was calculated to demonstrate the
insufficiency of classical economics to recognize and reflect the variety of
conditions existing in different countries and, most especially, in Germany.
Like Sismondi, List subordinated economics to politics in general. In his
view, it was not enough for the statesmen to know that the free interchange
will increase wealth (as demonstrated by the classical economists); he must
also know the ramifications of such action for his own country. Thus List
argued that free trade that displace either population or domestic industry is
undesirable. Moreover, List would not sacrifice the future for the present. He
maintained that the crucial economic magnitude in economic development is not
wealth (as measured by exchange values) but productive power. In his own words,
" The power of producing wealth is...infinitely more important than the wealth
itself". Thus economic resources must be safeguarded so that their future
existence and development are assured. This view constitutes further
justification for List's protectionist arguments; it also lies at the root of
the popular "infant-industry" argument in support of protective tariffs.
For List, the ultimate goal of economic activity should be national
development and the accretion of economic power. In this, he (as Marx was to do
later) perceived industry as more than the mere result of labor and capital.
Rather, he conceived industry as a social force that itself creates and
improves capital and labor. In addition to effecting present production,
industry gives an impetus and a direction to future production. Therefore, List
recommended the introduction of industry into underdeveloped countries even at
the expense of temporary loss.
List's originality in economic theory and method consisted in his systematic
use of historical comparison as a means of demonstrating the validity of
economic propositions and in his introduction of new and useful points of view
in contradistinction to the economic orthodoxy of classical liberalism. In
stretching the dynamic fabric of classical economic growth by representing
economic development as a succession of historical stages, he provided a
methodological rallying point for the economists of the German historical
school. Thus List may appropriately be considered the forerunner of that
This reaction in favor of protection spread throughout the Western World in
the latter part of the 19th century. Germany adopted a systematically
protectionist policy and was soon followed by most other nations. Shortly after
1860, during the Civil War, the United States raised its duties sharply; the
McKinley Tariff Act of 1890 was ultra-protectionist. England was the only
country to remain faithful to the principles of free trade.
But the protectionism of the last quarter of the 19th century was mild by
comparison with the mercantilist policies that had been common in the 17th
century and were to be revived between the two World wars. Extensive economic
liberty prevailed by 1913. Quantitative restrictions were unheard of, and
customs duties were low and stable. Currencies were freely convertible into
gold, which in effect was common international money. Balance-of-payments
problems were few. People who wished to settle and work in a country could go
where they wished with few restrictions; they could open businesses, enter
trade, or export capital freely. Equal opportunity to compete was the general
rule, the sole exception being the existence of limited customs preferences
between certain countries, most usually between a home country and its
colonies. Trade was freer throughout the Western World in 1913 than it was in
Europe in 1970.