Outline:
1st
Introduction to the problem
2nd
Term and dissemination of mercantilism
3rd
The most important representatives of mercantilism
4th
The philosophy of mercantilism
5th
Aim hierarchy
6th
The monetary theory foundations
7th
The customs policy instruments of mercantilism
1st
Introduction to the problem
In
the first part of this lecture we will introduce the most important doctrines
that have been developed in the course of the history of economics.
We
had already mentioned in the introductory chapter 1 that modern economics
begins with Adam Smith in the late 18th century. For this reason, one might be
inclined to let this teaching history also begin with Adam Smith.
But
now we had already mentioned in the first chapter that the teachings of Adam
Smith were created as reactions against the mercantilism which was taught and
practiced at that time. For these very reasons it might be appropriate to begin
this history of teaching with mercantilism, since we can only understand and
classify the reactions of the teachings founded by Adam Smith correctly if we
also know the main principles and practices of mercantilism, which the
liberalism of Adam Smith had opposed. Thus, we begin our doctrinal history
overview with the presentation of mercantilism.
However,
there is a second reason to begin this teaching history with mercantilism. In
the course of this lecture, we will be able to see that at almost all times of
the examined epochs, predominantly only two basic tendencies have argued and
fought against each other, that one group (the liberalism) was concerned with
making visible that a market-economy system was the best of all possible
solutions, while the second group (the interventionists) fought for the
conviction that an economic system only produces satisfactory results if it is
guided and influenced in decisive points by the state.
One
of these two directions can be traced back to the liberalism taught by Adam
Smith, while the other direction has always drawn on the measures and ideas
already practiced by mercantilism. Of course, this permanent debate can only be
understood properly if we know the beginnings of both directions. In fact, the
ideas of John Maynard Keynes, for example, are sometimes described as neo-mercantilistic. For these reasons, too, we want to begin
this history of economic theory with mercantilism.
2nd Term
and dissemination of mercantilism
The
term 'mercantilism' originally comes from Latin and is derived from the word 'mercari = trading'. Marquis de Mirabeau was probably the
first to speak of mercantilism in 1763, thus referring to the prevailing
economic theory at that time. Adam Smith, too, had always spoken of
mercantilism when he opposed these teachings. Later on,
this term was used generally to refer to the then prevailing doctrine; while at
first only the critics of this doctrine (Mirabeau and Smith) spoke of
mercantilism, the term was later used by the followers of this doctrine.
Mercantilism
thus means political influence by the state on trade and production in general
and foreign trade in particular. Today, this term is
largely equated with interventionism of the state of any kind, which aims to
influence private economic entities, but principally enterprises.
Mercantilism
in the form in which Adam Smith opposed it was the economic policy doctrine of
absolutism. Absolutism was the predominant state system beginning at the end of
the 16th until the 18th century and disseminated mainly in France, but also in
a somewhat weaker form in England and in several German small states. Here,
absolutism initially emerged in France and reached its peak under the Sun King
Louis XIV and under King Louis XV. The manner in which
Louis XIV ruled and held court in Versailles soon became a model for the other
rulers in Europe, especially for the Saxon King August the Strong.
The
absolutist king strove for the exclusive rule in his dominion. Louis XIV is
supposed to have said once: 'I myself am the nation' (L'État,
c'est moi). In the Middle
Ages and in the beginning of modern times, the respective ruler had to share
his power with the nobility and the clergy, he was controlled by the
parliaments of the estates, in which nobility, clergy and citizens were
represented.
In
this context, the parliaments of the estates had primarily the right to tax
approval. In this way, they could significantly curtail the power of the king.
At the same time, the king was also dependent on the nobility, as all
activities at court and in war were carried out by the nobility. On the one
hand, the nobles were obliged to work for the king in this way, namely by
providing mercenaries for the war campaigns of the kings, and on the other
hand, they had to carry out the most varied tasks at court. On the other hand,
however, the king himself depended in this manner on the willingness of the
nobility to cooperate.
The
absolutist rulers now strove to break this power of the estates. For this
purpose, they created a standing army, which meant that warfare and its success
no longer depended on how many combat-ready and trained mercenaries were
provided by the nobility. At the same time, they established a civil service
with the help of which all tasks at court could be carried out, so that the
king was no longer dependent on the services of the nobility at court.
In
this way, the king was able to use his scarce resources much more efficiently
than before. On the one hand, for the individual tasks the most capable
officials could be assigned. On the other hand, the fact that now certain
people were always available for the same task increased their abilities even
more.
3rd The
most important representatives of mercantilism
As
already outlined, mercantilism originated in France and was also most
widespread there. A forerunner of French mercantilism was Jean Bodin, lawyer and natural law philosopher, who lived from
1530 - 1596. He had also recognised already the
central importance of an active trade balance for the welfare of a nation, a
major concern of French mercantilism.
But
the main representative of mercantilism in France was Jean Baptiste Colbert,
who lived from 1619 to 1683 and was Louis XIV's finance minister for a longer
period. According to his ideas, the aim of an active trade balance was to be
achieved by way of a corresponding protectionist customs policy. Thus, Colbert
increased import duties, while on the other hand he tried to promote exports by
all available means. The development of a French merchant fleet served to
strengthen foreign trade. Colbert also emphasised
already the importance of the colonies for the French economic system.
But
according to Colbert, the aims of mercantilism should not only be achieved by
promoting foreign trade. Colbert also pursued the aim of promoting domestic
production by granting monopolies, further by quality controls, protective
measures and state subsidies. These measures were so typical for French
mercantilism that in France it was simply referred to as 'Colbertism'
in the subsequent time.
In
England the mercantilist ideas were mainly represented by William Petty, a
British economist and statistician who lived from 1623 to 1687. From a
historical point of view, he carried out one of the first econometrical studies
on Ireland. He is also considered a forerunner of classical economics and
supported an only moderate mercantilism. With him, also the first approaches to
labour value theory were found, which later became
the focus of David Ricardo's analyses. It was also Petty who introduced
statistical and demographical methods into economic analysis.
Eventually,
in Germany a very special variety of mercantilism emerged - mainly due to a
political particularism. Here, the focus was less on questions of foreign trade
than rather the efficient organisation of state
administration, and this political debate brought about a wealth of
administrative literature. For example, Joseph Schumpeter had spoken of the
fact that in England merchants wrote for merchants, whereas in Germany
professors and civil servants wrote for civil servants. Johann Peter Süßmilch, the field preacher of Frederick the Great, was of
particular importance among the cameralists
with his work on 'the divine order in the conditions of the human race', which
marked the beginning of a population theory. Professor Johann Joachim Becher
from Mainz also achieved greater importance among the cameralists,
as he already distinguished between monopolies (Monopolium)
and competition (Polypolium), thus heralding the
beginning of the theory of market for structure.
Despite
a uniform name, the mercantilistic works differ
considerably between the individual countries. True, all mercantilists strive
to give their rulers advice on wise economic policy, but it is difficult to
find a common denominator for these works. Only on the one issue of the crucial
importance of the precious metals gold and silver for
the prosperity of the economy all mercantilists did agree. A country should make an effort to keep the precious metals in the country
or, if it does not have its own gold and silver mines, to bring them in by
foreign trade (by means of an active trade balance).
4th The
philosophy of mercantilism
In
almost all the treatises of the representatives of mercantilist theses a basic
conviction is emerging: The advantage of the one (country) becomes the
disadvantage of the other (country). One could initially interpret this
relationship from a moral point of view. Accordingly, one is entitled to strive
for one's own advantage, even if the other one suffers a disadvantage.
According to Christian conviction, this may be considered amoral and therefore
undesirable, since Christian morality draws a line for selfish striving where
another person suffers harm because of the own actions.
However,
the mercantilist philosophy goes a step further and interprets the statement:
'the advantage of one is the disadvantage of the other' not only in a moral
sense. It understands this statement as an explicative statement in the sense
that no other relationship between two partners is possible. Whenever an
activity is to the advantage of the one, the other always suffers
disadvantages. Either I harm the other or he harms me. Another alternative is
not seen at all. In this world, the natural law of 'eat or be eaten' also
applies to interpersonal relationships.
Let's
take a closer look at this mercantilistic basic
conviction by starting from a matrix that lists all possible alternatives that
are available to an acting person. We can - if we take advantage and
disadvantage as criteria for classification - distinguish between five possible
alternatives.
Alternatives
1 and 2: It is quite conceivable that certain open alternatives do not bring
any advantage at all to the respective actor (alternative 1) and in some cases
even cause harm (alternative 2). Here, it is irrelevant how the situation of
the partners changes: This can remain unaffected, bring advantages, but also
harm.
It
is clear, a person who is trying to maximise its
benefits will not choose such alternatives, nor will anyone who is not characterised by an altruistic attitude give the advice to
choose such alternatives.
Alternative
3: Furthermore, alternatives are conceivable which bring advantages to the
respective actor (perhaps even merely promise advantages), without affecting
the situation of the respective other. There will probably be nobody who
advises against such an alternative. Even to those who respect the interests of
their fellow human beings, this alternative will generally be considered
desirable.
Alternative
4: We now look at the alternatives which promise advantages to the actor just
like alternative 3, but at the same time cause harm to fellow human beings. It
is clear. This is where the opinions differ: While the mercantilist clearly
considers such an alternative to be justified and also
desirable, a Christian-based morality comes to a rejection. Of course, either
here, it is not rejected that such alternatives exist and that a majority of people regard such alternatives as justified.
Alternative
5: Finally, those alternatives remain in which all involved parties gain
advantages. It is clear, in these cases such alternatives are considered highly
desirable from all points of view.
Of
course, another alternative could also be conceivable, where the advantage of
the actor would show different effects on third parties: Some are harmed by the
action, others also experience advantages, a third group remains unaffected.
However, we can assign such possibilities to alternatives 3, 4 and 5, which
have already been discussed. In this case, an action comprises several
alternatives - with regard to the effects on others -
and thus represents a mix of the other alternatives.
The
essential difference between mercantilists and other directions is now that
mercantilism differs from other schools of thought not only in how the
individual actions are judged morally. Mercantilism also denies, in contrast to
other directions, that there are alternatives in the real world that do not
belong to category 4. The advantage of the one is (almost) always connected
with a disadvantage of another. This means that from a mercantilistic
point of view category 4 contains 100% of the alternatives, while all other
categories are empty.
We
need to ask ourselves now, on the basis of what
findings has mercantilism arrived at this pessimistic view, does this
conviction not contradict our everyday experiences? Don't we notice in our
lives that at least some of the possible alternatives are beneficial to
feasibly several people at once?
The
answer to this question can be found in the consideration of the trade balance.
The trade balance of a country compiles all income and expenditure resulting
from trade with other economies. On the left-hand side of the balance sheet we
enter all income from trade relations with other countries, while on the
right-hand side we enter all expenditure arising from foreign trade relations.
Instead
of the trade balance, we could have chosen the current account balance or even
the balance of payments. The current account balance is based on the trade
balance and furthermore includes revenues and expenditures from the transfer of
services and unpaid performances. Finally, the balance of payments includes all
payment flows from foreign trade relations, i.e. starting from the current
account balance additively short and long-term capital movements including
foreign exchange trade, are also taken into account.
The fact that mercantilism was generally based on the trade balance rather than
the current account was simply due to the fact that
trade in services was not yet a major factor in international trade. Finally,
the balance of payments is less suitable for our considerations, simply because
a balance of payments is by definition always in
balance.
In
general, imports are paid by foreign exchange revenues which are generated due
to the export of goods. If the values of exports and imports were the same, all
imports could be paid from the foreign exchange revenues in connection with the
exports.
However,
foreign trade transactions can always be paid with gold, the official
international currency of the time. Importers feel compelled to take this step
if the foreign exchange revenues from exports are not sufficient
to pay for all intended imports. Basically, the importer can always pay for his
imports with both forms of payment. Whether he pays with foreign exchange or
with gold depends solely on whether foreign exchange or gold achieves a lower
price. Whenever less is exported than is imported, the exchange rates rise with
the consequence that at a certain price the purchase of gold becomes cheaper
and it pays off for the importer to pay with gold. This price of a currency is
therefore also called gold-point.
The
import value in this case corresponds by definition to
the sum of foreign exchange revenues plus the payment with gold, which must
automatically lead to a gold export.
Conversely
it applies, of course, that if the export value total exceeds the import value
total, then for exports it is no longer exclusively foreign exchange that is
received, but that exports partly lead to gold revenues and thus to gold
imports. Here too, it applies that in the case of an export surplus, the sum of
foreign exchange earnings and gold imports corresponds to the export value
total. Both sides of the balance of payments are therefore always - at any
given moment - by definition balanced if, in addition
to the proceeds from the transfer of goods, the transfer of gold is also
included in the analysis.
Let
us now consider additionally the balance of trade of the countries which do
foreign trade with us. By definition, the import value
total of our economy is equal to the export value total of all our trading
partners. This relationship results simply from the fact that the same goods
leaving our country, i.e. which are exported, are imported by one of our
trading partners, so that both values must be the same, since they relate to
one and the same goods. The same applies, of course, mutatis mutandis to the
export value of our country. For the same reasons, this also corresponds to the
import value total of the foreign economies with which we do foreign trade.
From
these considerations follows now that an export surplus of the own country is
always accompanied by an equally large import surplus of our trading partners.
If we now strive for an export surplus, this is tantamount to the fact that if
these efforts are successful, foreign countries as a whole
must automatically achieve an equally large import surplus with respect
to our national economy.
In
general, we speak of an active trade balance of an economy if it shows an
export surplus; conversely, a country shows a passive trade balance if the
import value sum exceeds the export value sum.
If
we now assume that the welfare of an economy increases ceteris paribus the
higher the export surplus is and decreases accordingly the higher the import
surplus is, we can automatically deduce the core theorem of mercantilism: it is
desirable to achieve an active trade balance, but this automatically means that
foreign countries achieve a passive trade balance with respect to our economy,
which according to these conceptions is equivalent to a loss of welfare abroad.
Now
we just have to clarify why the mercantilists assumed
that an active trade balance is desirable for an economy in any case. Does this
idea not contradict the appearance? If we receive more imported goods from
abroad than we ourselves export abroad, do we not increase our wealth, and the
more goods we receive for a unit of export, the better off we are indeed?
However,
this consideration would be too superficial. When abroad provides us with more
goods than we supply abroad in exchange, we do not receive this surplus of
goods as a gift, we have to pay for it with gold, and
thus we lose welfare by exporting gold.
Nevertheless,
it can be stated that an active trade balance is highly undesirable for at
least some of the domestic entrepreneurs because of its direct consequences.
For if exports outweigh imports, then more foreign exchange is received than is
needed to pay for imports. This means that in a free foreign exchange market,
the supply of foreign exchange exceeds demand, with the result that the
exchange rate declines.
This
in turn means, ex definitione, that the value of our own currency is
increasing. At the same time, domestic entrepreneurs are in increased
competition with foreign enterprises, since they can now charge a lower price
calculated in the currency of our country in order to obtain the dollar price
applicable abroad. In other words, if the balance of trade is active,
international competition will intensify, and domestic entrepreneurs now run
the risk of being able to export less in total in the future due to increased
competition. At the same time, domestic entrepreneurs face increased
competition from abroad. Why should this be an advantage from the perspective
of the whole economy?
The
answer is, of course, that the absolutist ruler can only achieve his aims if
the economy thrives. Indeed, as we will show in the next section, the aims of
absolutism can only be achieved if the state increases its revenues, that is,
if it can raise higher taxes, and of course the prospect of increased tax
revenues increases as the economy grows as a whole.
According to the mercantilists, however, the growth of the economy itself
depends in turn on whether the economy is supplied with sufficient
money. We had a gold currency at the time of absolutism, and France was a
country that did not own any major gold mines at that time, so that the
quantity of gold could mainly be increased only on the basis
of an active trade balance. More below we will take a critical look at
these monetary theory teachings of mercantilism. At this point it is sufficient to demonstrate why, from a mercantilist
perspective, an active trade balance is essential for the well-being of an
economy and thus why the advantage of one country is always accompanied by the
disadvantage of one or more other countries.
Concluding,
mercantilism must be seen as a doctrine that sees the
advantage of a nation as the result of conflicts between the national
economies. We shall see in a subsequent chapter that liberalism vehemently
opposed this idea and defended the opinion that, on the contrary, harmonious
relations between nations do exist, provided that one is prepared to abandon
the mercantilist regulation of foreign trade by the state and to allow free
trade, which is not hindered by customs duties and other measures. However, we
will not be able to dedicate ourselves to this comparison until the broad
outlines of liberalism have been set out. Then we will also see that the
differences between the two worldviews are somewhat more complicated than characterising one worldview only as a conflict model and
the other only as a harmony model.
5th Aim
hierarchy
The
various aims and measures, which are summarised under the heading of
mercantilism, can now be listed in a clear and concise hierarchy of aims.
On
the first, highest aim level is the aim of the absolutist ruler to
become independent (absolute) and to shake off the existing feudal controls by
the estates and the parliament of the estates. All other aims and complexes of
measures of mercantilism can be subordinated to this aim.
This
aim is directly served at the second aim level by the formation of a
standing army and the establishment of a civil service. The ruler can dispose
of a standing army at any time; then he is no longer dependent on the goodwill
and of course not on the ability of his own vassals to recruit an own army. At
the same time, the ruler can also directly ensure that this army is up to date
with the latest equipment and war technology.
If
the absolutist ruler has furthermore an established, permanently working
bureaucracy at his disposal, then again he is no longer dependent on the
services of the nobility in these matters either; he himself can ensure that
his officials are sufficiently trained for their tasks and that for a
particular task the respectively most capable officials are selected.
The
downside of these advantages, however, is that both the formation of a standing
army and the introduction of a permanently active bureaucracy entail high costs
for the ruler, which previously he has been able to largely pass on to his
subordinate vassals within the framework of the feudal order.
Therefore,
there developed on a third aim level the need to levy new taxes. In the
previous feudal order there were, with few exceptions, mainly direct taxes,
which were levied as duties on land, whereby the ruler had made land available
to his subordinates as a fiefdom and gave him the right to demand a part of the
yields as periodic duties. However, in a long dispute with the ruler, the
parliaments of the estates had fought for the right that direct taxes on land
had to be approved by the parliament of the estates.
Thus,
it was clear from the outset that the ruler could certainly not achieve his aim
by financing armies and civil servants from taxes which had to be approved by
the very same estates whose controls were to be shaken off. Thus, it required
the introduction of new types of taxes, which did not have to be approved
especially by the parliament of the estates. These were all indirect taxes on
the turnover of goods or customs duties on imports or exports. Since industrial
production and a widespread trade in goods only emerged in modern times, the
estates did not yet have the right to decide on indirect taxes.
But
the tax revenue depends directly on the fact that also many goods were produced
and traded, on which the state could then levy a sales tax or customs duties.
Thus, the state could only achieve its aim of increasing the tax revenue to
finance the army and civil service if it simultaneously ensured that production
and trade were expanded. The state was thus forced to provide incentives to
expand production and trade at a fourth aim level.
For
this purpose, the ruler granted so-called monopolies to willing merchants, i.e.
rights to produce and distribute certain raw materials or goods as the only
ones in an area. These enterprises were often also favoured by state subsidies
(grants).
Now,
the economic growth of an economy depends not only on whether the country has
sufficient entrepreneurial personalities who have the technical know-how to
produce these goods and who are at the same time willing to bear the risks
involved in almost any production. A smooth economic growth can only be
guaranteed if an economy is also supplied with sufficient money. This is
because the quantity of money determines the price level according to the
quantity equation, which was already known to some mercantilists. If the money
supply is not sufficient to purchase the goods produced, the prices decline and
thus the entrepreneurs would lose the possibility and the incentive to maintain
production for the future.
The
currency in use during the absolutist era was mainly gold. Thus, in order to
maintain economic growth at a fifth aim level, the state had an
immediate need to expand the quantity of gold as much as possible, but by all
means not to reduce it. This is where the aim of an active trade balance,
already discussed in the previous section, comes into play. The state strives
for an active trade balance as a way of expanding the circulating money supply
and thus maintaining economic growth. Since the French state during the time of
Louis XIV did not possess any major gold mines and thus did not have its own
national gold production, it was dependent on the trade balance remaining as
active as possible and that part of the exported goods were thus paid for with
gold.
However,
foreign trade was promoted by the mercantilist state not only to guarantee a
sufficient supply of money, but also because the state was able to increase its
revenues by levying customs duties.
However,
the aim of maximising customs revenue is in some contradiction with the aim of
achieving an active trade balance. The more exports exceed the import total,
and thus the import value total decreases, and the more the trade balance
becomes active, the less the state generates additional income from import
duties. Now, of course, the state could also levy duties on exports and, as we
will see below, the mercantilist state did indeed levy export duties, but - as
we will see below - only on very specific exports, which were mainly limited to
raw materials.
With regard to the export of goods, the
mercantilist state even tried to grant premiums in order to open up new markets
abroad for domestic enterprises. At the same time, the state introduced import
duties not only to generate additional income, but also to protect domestic
enterprises from foreign competition.
In
this way, the state expected to receive additional revenues in case the
production of the domestic enterprises would be expanded and due to this
production new tax revenues from sales taxes and consumption taxes were
generated. The state therefore had to make a certain compromise to ensure that
the activation of the trade balance did not increase too much, because
otherwise customs revenues would automatically have decreased. The aim of a
sufficient supply of money was therefore in a certain conflict with the aim of
the highest possible customs revenue from foreign trade.
6th The
monetary theory foundations
I
had already pointed out that at least some of the mercantilist writers had
recognised monetary theory connections, which later found their way into the
so-called quantity theory and quantity equation with the classicists.
The
quantity equation establishes a correlation between the value of money in
circulation and the value of traded goods. Here, the value of money is
determined by the quantity of money in circulation (G) multiplied by the
velocity of circulation (U), i.e. the quantity that indicates how often one and
the same piece of money is used on average to buy goods within a period. The
value of traded goods, by contrast, is the product of the real quantity of
goods (H also referred to as the trading volume) and the average price level of
traded goods (P).
In
each period, the value of the trading volume must be equal to the value of the
money, since they are simply two sides of the same purchase act. The value of
money indicates the amount of money spent to purchase the goods, while the
value of goods indicates the amount of revenue that is received by the supplier
of those goods. Of course, both values are identical, the exchange act is
viewed once from the perspective of the consumer and once from the perspective
of the supplier. Therefore, the equation applies:
If
we now proceed from the assumption that the velocity of circulation of money
depends on the payment practices which remain constant, at least in the short
term, and is therefore also constant and given, and that, furthermore, the
supply of goods can also be regarded as constant and given in the short term,
then the price of goods necessarily depends on the quantity of money. If, for
example, the available money supply together with its velocity of circulation
is not sufficient to buy the supply of goods, the price of the goods will
continue to fall until the entire supply can be bought up with the available
money supply.
If
we now assume that the absolutist ruler wants to have the goods turnover
increased because this is the only way for him to obtain the hoped-for
additional tax revenue, he must ensure that the money supply is also expanded
accordingly. Since obviously only gold is recognised as money and France was
only able to increase its gold reserves by means of an active trade balance,
the logical consequence of this connection is the demand for an active trade
balance.
The
question remains, however, why it has to be gold in order to expand the money
supply, why at that time the money supply was not simply expanded by the state
or a central bank commissioned by the state providing the necessary amount of
money in the form of banknotes?
Precisely
because we were able to establish that at least some mercantilists knew about
the quantity-theoretical relationships, one should actually have expected them
to realise that the value of money at a given velocity of circulation of money
and given trading volume depends solely on the quantity of money in
circulation. This would have led to the conclusion that the value of money is
not primarily determined by its precious metal content, but solely by the
amount of money in circulation.
Why
was this insight obscured for the mercantilists? Obviously, they were based on
the idea that the private exchange partners only trusted in the value of money
if they could also sell the money as a commodity. The commodity value of money
corresponds to the precious metal content and is therefore accepted by the
population, according to the mercantilists, whereas the commodity value of a
banknote is only a small fraction of the nominal value of money.
But
now we know that in general times the population of today accepts banknotes
very well and also book money. The reason for this is mainly that the state has
declared paper money to be official money and this means that anyone who pays
his debts with this state-guaranteed money has finally repaid these debts. No
creditor would succeed in court if he refused to accept paper money and
insisted that the debt was paid in another, supposedly harder currency. It is
therefore sufficient for the state to give this guarantee (that debts are
considered to be definitively repaid when they have been paid with this money)
to create confidence in this money.
7th The
customs policy instruments of mercantilism
Finally,
let us take a more detailed look at the customs policy instruments of
mercantilism. These instruments are certainly among the best thought-out
complex of measures of mercantilism. As already shown, these instruments serve
two aims. On the one hand, it is intended to provide the state with additional
revenue that cannot be controlled by the parliaments of the estates. On the other
hand, the state also wants to establish new markets for domestic enterprises in
this way. Here applies that the import duties serve to prevent domestic
enterprises from being exposed to foreign competition. At the same time, the
state facilitated access to foreign markets for domestic enterprises by
granting export subsidies, namely by enabling domestic enterprises to sell
their goods abroad even below cost.
In
this context, finished products are treated differently from raw materials.
While the state endeavoured to curb the import of goods by levying import
duties, at the same time the aim was to prevent the export of raw materials as
far as possible by imposing export duties. France was one of the countries
which had only a small amount of raw materials available domestically and
which, even during the high period of mercantilism, did not yet have sufficient colonial states in Africa, America or Asia from
which the required raw materials could be obtained. They thus had to rely on
the few raw materials available being reserved for domestic enterprises. This
policy was supplemented by the fact that premiums were granted by the state for
the import of scarce raw materials, just as premiums were paid for the export
of goods.
This
policy may have been quite successful at the beginning of the mercantilist
phase. However, it must be realised that such a protectionist policy can only
be successful so long as only a single state pursues this policy. But this
cannot be expected in the long run. In the long run, the negatively affected
states will react; they must react simply because no state can maintain a
passive trade balance in the long run. As long as the balance of trade remains
negative, gold or hard currency will flow out and no country has unlimited gold
or foreign currency reserves.
Particularly,
if no monetary policy measures (devaluations) are possible, most states will
react to 'hostile' import duties by levying duties on the imports of those
states that have started this customs policy. A tariff war will break out and
this reciprocal levying of duties and their increase have two fatal
consequences. Firstly, they reverse the initial successes of unilateral tariff
collection, and the terms of trade shift back in the direction of the price
relations which existed before this customs policy began. In any case, the
measures have been to no avail in the long term.
More
serious, however, is the fact that each duty levied - whether by the country
itself or by foreign governments - leads to a reduction in the absolute volume
of trade. However, since the welfare of a country is crucially dependent on the
extent to which an international division of labour takes place, this policy
harms all nations involved in the customs war in the long run.
Trade
agreements between different economies generally aim to stimulate international
trade by mutually reducing trade barriers. Precisely the opposite aim can be
observed in trade agreements concluded by states influenced by mercantilism.
Typical for such treaties that prevented trade was the Methuen Treaty, which
England and Portugal concluded in 1703. The main purpose of this treaty was to
prevent imports of goods from France as far as possible.