Theme 1: Trade Wars and Unintended Consequences
What are the key elements of mercantilist beliefs on international trade? (10)
The mercantilist community strongly believes in the protection and promotion of
industry, which can be seen through the implementation of the Navigation Acts and
Corn Laws which restrict the scope of the market in international trade.
o Similar to the mercantilist policy practiced today.
Mercantilists mainly protect infant industries, and imports substitute industrialization
within those countries.
View self-sufficiency and economic development as their goals because they are
lagging behind in industrial development.
Encouragement of exports – allows for a balance of trade surplus, from which they
can then import goods / save.
o Exports create employment for workers and profit for industrialists and both of
these foster economic growth.
Import restrictions, to protect domestic manufacturing industries and workers.
o Tariffs – often used and is central to many developing countries.
o Embargos
The mercantile trade policy: pursues values of social justice, national development
and self-sufficiency more so than values of efficiency and profitability which are
associated with liberal trade ideas.
What are the key elements of and justification for Donald Trump’s revival of the
mercantilist approach to trade? Motivate your answer. (15)
Old Mercantilism Trump + Neo-mercantilism
Navigation Law (example) Investment blocked for national security ->
organisation (CIFUS) which looks at foreign
investment.
Not a theory but a collection of measures to All investments are blocked for national
achieve the national interest and accumulating security (national interest) i.e copyright
state power for national interest at the protection.
expense of foreign states
14th and 15th century - difcult transport EU formed to bind countries who were often at
war, and this created a ‘national interest’
National security (self-sufciency), trade I.e Donald Trump: tarifs because China steals
caravans -> intercontinental travel was intellectual property from USA.
dangerous
NB for the UK to have maritime security, they He wants to punish China through trade policy,
therefore needed the money (gold and silver) but the USA have a huge public debt.
Wealth of nation: depends on amount of gold A large part of their debt is owned by China.
and silver in reserve. Through exports / trade
(therefore imports were bad as they decreased
gold and silver reserves)
Legal monopolies were favoured by the In order to export more, the country needs to
government. In the UK, the crown and be more open, but Trump is closing it. Trump
1
, parliament favoured diference monopolies. looks more at the product exports and not the
They have the power to infuence foreign services exports.
policy (trade policy). (Money follows power)
Emphasis was on a fxed / static amount of Policy is aimed at national interest, and uses
wealth (a zero-sum game). If I get more, you tarifs.
get less.
Policy was not encouraging peace, it incites Adam Smith in Wealth of Nations - why is it
war, there were fghts over existing resources, logical for individuals but not for a nation?
and no expansion / using resources more
efciently.
National interest
DT trade policy agenda found on five state pillars:
1. Support for US national security
2. Strengthening the US economy
3. Negotiating better trade agreements
4. Enforcement of US trade laws
5. Efforts to reform the World Trade Organisation (WTO)
Donald Trump’s political campaign trail targeted the national security and the
perceived imbalances and inequity of trade regimes in the US.
Justification is that over the last decade, global economic activity has contracted
significantly due to the 2009 Financial Crisis, and along with other factors, the
continuous expansion of free trade areas and non-reciprocal market access has
started to decline.
How does international trade theory (Adam Smith and David Ricardo) defeat
Mercantilist thoughts? (15)
Essence of Adam Smith’s argument - absolute advantage. If you are absolutely more
efficient in producing product A than your trading partner. This would imply you are
doing it with less resources. You can then specialize in the production of this good,
produce surplus, export surplus and use money from export to pay for your imports
which you are not so good at producing. For this to happen you need to have an
open market (access to a bigger market).
What if one country has absolute advantage over lots of things?
Ricardo - gives us theory of comparative cost advantage. Showed that even if one of
the trading partners has absolute advantage, if we look at the relative cost, then
introduce opportunity cost (makes it easier to explain). The ratio of how many of
product A you need to give up to produce product B is the relative cost.
Idea that a trade deficit is bad and trade deficit is good is nonsense, need to look at it
in context. Every country can’t produce everything, need to import stuff. For example,
SA needs to import capital, and because we are a developing nation it serves to
reason why we are in a trade deficit.
For example the US is in a trade deficit, but they have a surplus of services. This
means good place to invest which brings in investments because of the availability of
services.
2
What are the key elements of mercantilist beliefs on international trade? (10)
The mercantilist community strongly believes in the protection and promotion of
industry, which can be seen through the implementation of the Navigation Acts and
Corn Laws which restrict the scope of the market in international trade.
o Similar to the mercantilist policy practiced today.
Mercantilists mainly protect infant industries, and imports substitute industrialization
within those countries.
View self-sufficiency and economic development as their goals because they are
lagging behind in industrial development.
Encouragement of exports – allows for a balance of trade surplus, from which they
can then import goods / save.
o Exports create employment for workers and profit for industrialists and both of
these foster economic growth.
Import restrictions, to protect domestic manufacturing industries and workers.
o Tariffs – often used and is central to many developing countries.
o Embargos
The mercantile trade policy: pursues values of social justice, national development
and self-sufficiency more so than values of efficiency and profitability which are
associated with liberal trade ideas.
What are the key elements of and justification for Donald Trump’s revival of the
mercantilist approach to trade? Motivate your answer. (15)
Old Mercantilism Trump + Neo-mercantilism
Navigation Law (example) Investment blocked for national security ->
organisation (CIFUS) which looks at foreign
investment.
Not a theory but a collection of measures to All investments are blocked for national
achieve the national interest and accumulating security (national interest) i.e copyright
state power for national interest at the protection.
expense of foreign states
14th and 15th century - difcult transport EU formed to bind countries who were often at
war, and this created a ‘national interest’
National security (self-sufciency), trade I.e Donald Trump: tarifs because China steals
caravans -> intercontinental travel was intellectual property from USA.
dangerous
NB for the UK to have maritime security, they He wants to punish China through trade policy,
therefore needed the money (gold and silver) but the USA have a huge public debt.
Wealth of nation: depends on amount of gold A large part of their debt is owned by China.
and silver in reserve. Through exports / trade
(therefore imports were bad as they decreased
gold and silver reserves)
Legal monopolies were favoured by the In order to export more, the country needs to
government. In the UK, the crown and be more open, but Trump is closing it. Trump
1
, parliament favoured diference monopolies. looks more at the product exports and not the
They have the power to infuence foreign services exports.
policy (trade policy). (Money follows power)
Emphasis was on a fxed / static amount of Policy is aimed at national interest, and uses
wealth (a zero-sum game). If I get more, you tarifs.
get less.
Policy was not encouraging peace, it incites Adam Smith in Wealth of Nations - why is it
war, there were fghts over existing resources, logical for individuals but not for a nation?
and no expansion / using resources more
efciently.
National interest
DT trade policy agenda found on five state pillars:
1. Support for US national security
2. Strengthening the US economy
3. Negotiating better trade agreements
4. Enforcement of US trade laws
5. Efforts to reform the World Trade Organisation (WTO)
Donald Trump’s political campaign trail targeted the national security and the
perceived imbalances and inequity of trade regimes in the US.
Justification is that over the last decade, global economic activity has contracted
significantly due to the 2009 Financial Crisis, and along with other factors, the
continuous expansion of free trade areas and non-reciprocal market access has
started to decline.
How does international trade theory (Adam Smith and David Ricardo) defeat
Mercantilist thoughts? (15)
Essence of Adam Smith’s argument - absolute advantage. If you are absolutely more
efficient in producing product A than your trading partner. This would imply you are
doing it with less resources. You can then specialize in the production of this good,
produce surplus, export surplus and use money from export to pay for your imports
which you are not so good at producing. For this to happen you need to have an
open market (access to a bigger market).
What if one country has absolute advantage over lots of things?
Ricardo - gives us theory of comparative cost advantage. Showed that even if one of
the trading partners has absolute advantage, if we look at the relative cost, then
introduce opportunity cost (makes it easier to explain). The ratio of how many of
product A you need to give up to produce product B is the relative cost.
Idea that a trade deficit is bad and trade deficit is good is nonsense, need to look at it
in context. Every country can’t produce everything, need to import stuff. For example,
SA needs to import capital, and because we are a developing nation it serves to
reason why we are in a trade deficit.
For example the US is in a trade deficit, but they have a surplus of services. This
means good place to invest which brings in investments because of the availability of
services.
2
