Mercantilist and Modern Use of Tariffs
Mercantilism held tariffs in high favor for the reduced competition and monopolies, whereas modern economists disputed this in favor of a hands-off approach of free trade. Through the centuries and schools of thought, beliefs about tariffs changed and comparisons between how Mercantilism and modern economists will be shown throughout this paper. The Mercantilism concept of high, protective, exclusionary tariffs on imports allows domestic businesses and national economies to enjoy a monopoly without foreign competition.As it is believed in Mercantilism theory, a country loud be financially stronger if they were to rid themselves of foreign competition and they are able to do that by placing high taxes on the goods that are coming into their country from others. By incurring higher taxes and making foreign goods more expensive, a domestic consumer would have an incentive to buy domestic goods since they are cheaper.
Although this is how the consumer behaves, a producer would have less incentive to create high quality goods as they do not have any competition.
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Because they are in a monopoly, they can create sub-par products and expect them to be recessed because that is all the consumer has to decide from. Now that you have seen how the Mercantilism’s high tariffs work in theory, lees look at how they have worked in history. During Mercantilism, heavy emphasis was placed on national power. That was their economic goal and their way to achieve it was through maximizing their amount of gold. This was their incentive for expeditions and war as they believed that if they could succeed in this regard, it would be impossible for their nation to suffer.In the sixteenth century, France was one of the strongest countries in Europe.
During this time, they adopted policies of mercantilism by restricting imports from Spain for wool and restricting exports of gold. France became a pioneer for protectionism in the seventeenth century as they continued to restrict imports while encouraging exports. France worked to increase commerce and exports by building extensive roads to serve as trade routes. England adopted much of the same principles and was able to become a powerful trading country. They placed heavy tariffs on imports while giving incentives for exports.In an effort to hinder other countries’ manufacturing industries, they banned the exports f certain raw materials. While the Netherlands was the trading leader of the world until Britain later took that title, they actually did not use many Mercantilism concepts.
The Dutch ruthlessly engaged in several wars in the sixteenth century to colonize other parts of the world to improve trade. They fought with France and Portugal to establish overseas trading networks. Instead of using tariff policy to regulate their own well-being, the Dutch were graced with natural geographical benefits that aided their trade supremacy.They were pioneers for overseas trade and were able to take advantage of European waterways, especially the Rhine and Amuse. They invested heavily in ships and shipbuilding and that coupled with their accessibility to waterways allowed them to connect with other nations. They also had the best accessibility to trade with Asia and were able to trade with them more than any other European country. In the middle of the seventeenth century, while other countries were in conflict, Britain saved and waited until their country had the resources to confront other European countries with more advanced mercantilism policies.
By the middle of the eighteenth century, high import tariffs and exclusionary policy by the French and British began to hurt the Dutch. The British and French effectively protected their own economies through this aggressive strategy, highlighting how well the tariff policy worked. Although new investment and increases in ports in these two countries would have helped the Dutch, they were excluded from the potential profits. Dutch traders experienced the fiercest competition they had ever seen which forced them to lose their supreme position that they had worked so hard to obtain two centuries earlier.Moving on to the twentieth entry, high tariffs have been seen in modern economies. In the late uses, American automobile manufacturers were trying to get protection through tariffs from Japanese manufacturers. Chrysler, General Motors and Ford all asked for help from the government to remain profitable.
The United States government agreed and reached an agreement with Japan that limited the amount of vehicles that could be imported to the US. This worked the same way as tariffs in the way that it increased demand for American made vehicles.When these protective tariffs were set in place, quality in American ears fell while firms raised prices. Without competition, they had reduced incentive to produce better vehicles. Now that you have seen how Mercantilism’s theory of high tariffs has been used in the past, let’s look at how modern economics’ free trade works internationally. Free trade occurs when two countries are able to trade goods across each other’s borders without intervention by the government through import taxes and tariffs or subsidies. Because there are no outside influences on supply and demand, the actual price of the good can be seen for comparison.
When woo countries trade with each Other, they can experience mutual gains from specialization in which they are both better off than if they did not trade. There is also opposition to free trade though and the main critique is for protectionism and the nationalistic fears of trade hindering an economy. Now that you have seen some of the theory regarding free trade, lets look at its place through history in modern economies. The concept of free trade was first established by the pioneer of modern economics, Adam Smith.He argued that England should have unregulated foreign trade and highlighted TTS benefits, such as when France can produce a good such as wine more productively than England, whereas England can produce a good such as wine more productively, then they can trade and both countries will be better off. Each country is able to have more of each good than if they were producing both items themselves. There are also increased benefits as labor becomes more specialized.
Workers become more efficient and costs are lowered while output increases. Smith criticized the Mercantilism policies which restricted the volume of trade.The Mercantilism looked at the wealth f a nation by the amount of gold that it had whereas Smith insisted that a nation’s wealth be defined by its flow of goods. While Mercantilism believed trade was a zero-sum game, in which one trader was a winner and one was a loser and that all goods in the world were at a fixed amount, Smith showed how both nations are actually better off because of trade and by doing so, raise the quantity of goods in the world. Problems with free trade can be shown throughout history in the twentieth century. At the start of the 19005, the Aqua’s per capita income was growing on average 1. Per year and Western Europe was growing at 1.
3% a year while utilizing free trade (Change, p. 27). During the same time, Latin American countries had some of the highest tariffs in the world yet were growing at a similar rate. Later in the 1 sass and 1 sass, while developing Latin American countries were using tariffs and protectionism, they were growing at roughly 3. 0% a year. Throughout the 1 sass when they adopted free trade policy, their growth fell to almost one third of that. While growth slowed down significantly, income inequality rose.
One of the main criticisms to free trade s the way in which it spreads the gap between rich and poor. Free trade generally does not make poor people rich but rather makes them poorer. The tariff policies of the Mercantilism and the modern economists could not be any more opposite. While Mercantilism encourage high protecting tariffs on imports, modern economists encourage free trade. Throughout history, both theories have been implemented to a country’s convenience and that can be seen throughout history. Although free trade is a modern concept, the Mercantilism concept of protectionism is still often seen today.