Реферат: Protectionnism and Free Trade in Economical Doctrines

The theoretical basis of a studyof international economic relations in its modern form was formed as a resultof a long and difficult process, full of successes but, nevertheless, withimportant mistakes.

The early roots are to be found,perhaps, in Antic Greece in the works of Aristotel, Platon and Xenophon. Ingeneral, the antic philosophers opposed to the big commerce, supporting theidea of a closed domestic economy. The closed character of the production of aself-supply type, dominating from the antiquity up to 15th century gave noincentives for developing any profound and constant studies on internationaltrade. In these conditions is in no way occasional that the theorists ofantiquity and Middle Ages (scholastics) exaggerated the role of production(especially agricultural) and pleaded against the «art of makingmoney», the chrematistics (after Aristotel).

At the dawn of the Modern Age(16th century) there appeared the first trials of more systematic analyses ofthe international economic relations.

Developed during the period of the downfall of feudalism andthe transition to capitalism, the mercantile theory was the first trial toexplain integrally the principles of international trade in a paradigm of theanalysis of economic reality.


Perhaps, the field ofinternational trade was first closely studied by men of affaires, in private orgovernmental employment, as no other topical area, as a part of an effort toincrease the wealth and the power of the nation, with which these men tended toidentify their own welfare. This body of doctrines, later named by Adam Smiththe «mercantile system» or «mercantilism», insisted thatthe acquisition of wealth, particularly wealth in the form of gold, was ofparamount importance for nationalpolicy. Mercantilists tookthe virtues of gold almost as an article of faith; consequently, they neverundertook to explain adequately why the pursuit of gold deserved such a highpriority in their economic plans.

The mercantilists held thateconomic policy should be nationalistic and aim to secure the wealth and powerof the state. This concept was based on the conviction that national interestsare inevitably in conflict — that one nation can increase its trade only at theexpense of other nations.

Thus the most pervasive and mostemphasized doctrine was the importance of bringing about and maintaining anexcess of exports over imports, for that was the only way for a country withoutgold and silver mines to increase its stock of the precious metals. In this waythe foreign trade, after mercantilists, was reduced to the maximum exports ofgoods for gold and silver and some exports of raw materials and preciousmetals.

The desire for a«favorable» balance of trade was never based by mercantilist writerson a to see their countries engaged in capital export, to make investmentsabroad, as the majority of them were at least confused as to the differencebetween money and wealth, and very often identified these two terms.

The idea was also that the stateshould provide its citizens with a monopoly of the resources and trade outletsof its colonies. A typical illustration of the mercantilist spirit is thefamous English Navigation Act of 1651, which reserved for the home country theright to trade with the colonies and prohibited the import of goods ofnon-European origin unless transported in ships flying the English flag. Thislaw lingered on until 1849. A similar policy was followed in France.


Thomas Mun

Thomas Mun, as a representative ofmercantilist school, was one of the firsts to deal extensively with the balanceof international trade and the balance of international payments. He firstintroduced 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 mercantilisttheory we can name also Edward Misselden, William Petty, and others.

With the emergence of mercantilismin the 16th-17th century, an extensive body of literature dealing with theinternational trade appeared, although we must add immediately that it yieldedrelatively few lasting contributions to international trade theory.

Mercantilists' ideas often wereintellectually shallow, and indeed their trade policy may have been little morethan rationalization of the interests of rising merchant class that wantedwider markets coupled with protection against competition in the form ofimported goods.



A strong reaction againstmercantilist attitudes began to take shape toward the middle of the 18thcentury. In France, the economists known as Physiocrats demanded liberty ofproduction and trade. In England, Adam Smith demonstrated in his The Wealth ofNations (1776) the advantages of removing trade restrictions. Economists and businessmenvoiced their opposition to excessively high and often prohibitive customsduties and urged the negotiation of trade agreements with foreign powers.

This movement was later namedliberalism and the very first economists fighting against the mercantile ideasare regarded to as the pre-classical liberalists.


Pre-classical Liberalism

18th century is often remarkedthrough the development of the scientific trend in studying human society. Inthis 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 theMiddle Ages, the human sciences became descriptive and explanatory. One of thefirst scientists which tried to follow these concepts are the pre-classicalliberalists and among them such economists as Dudley (Douglas) North,Cantillon, Hume, Condillac, and others.


Dudley North

North undertook a vigurous attackaimed at ridding the discussion of foreign trade matters from mercantilist«superstitions». He has fittingly been called the first «freetrader» in the Smithian sense. Viewing the whole world rather than asingle nation as an economic unit, he demonstrated that there's no fundamentaldifference between foreign and domestic trade. North also presented a conciseformulation of the automatic and self-regulating mechanism that provides anation with that sum of money required for carrying its trade.



Cantillon deflated mercantilisttenets by showing that if a country continues to sell more than it buys fromabroad, 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 togetherthe theory of self-regulating international trade, and he went beyond Cantillonin 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 ofclarity and incorporated it more consistently with the remainder of his workthan was the case with any of the earlier or contemporary writers. He includedthe influence of exchange-rate fluctuations on commodity trade in the mechanismas an additional equilibrating factor. Hume considered that the exchange rateequilibrates the trade balance of the country; this meaning that it grows, ifthe trade balance tends to the unfavorable one and in this way presses theimports, and vice-versa.



Condillac applied his utilitytheory to international trade and demonstrated that what holds true forexchange between two persons is largely applicable also to commerce betweennations. The inequality of subjunctive valuations he saw reflected, on a largerscale, in the total exchange transactions between nations. He decried thefoolishness of establishing trade barriers because it is in the very nature ofexchange that both parties will benefit — what is offered for sale always beingvalued less highly than what is acquired in return. If each nation insisted onselling only, they would all eventually wind up without foreign trade anddeprive themselves of its benefits. Condillac went beyond his predecessors Humeand Cantillon in showing that even if other nations continue putting upobstacles to international exchange, it will be advantageous for a particularcountry to adhere to free-trade principles. He concludes, somewhatoptimistically, that when trading enjoys complete and permanent liberty, wealthis bound to spread everywhere.


Classical Liberalism

Classical liberalistic school gaveus three models of international trade:

Ø the physiocratic model

Ø the absolute advantage theory

Ø the theory of comparativeadvantage


Physiocratic model

The mercantile policies imposed inthe 16th — 17th century, which proclaimed the accumulation of wealth throughtrade, 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 downfallof production, especially of agricultural one.

Gradually there appeares the ideathat the wealth consists of goods. In this sense, physiocrats can be consideredthe 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 newconception about the international trade appears. Once the wealth derives fromagriculture, it is not created by trade, therefore the trade must be based onlyon the exchange of equivalents, while money are no more than a means ofexchange.

The physiocrats oppose to theactive («favourable») balance, as it results from the export ofwealth (in the form of goods), and the import of money (which are not wealth).They fight to realise an equilibrated balance in international trade.



The founder of the PhysiocraticSchool, Quesnay, in all probability heavily indebted to Cantillon, brought outthe fact that the state of the balance of trade between nations is neither an indicatorof the advantages of foreign commerce nor that of the wealth of nations. But hewas the author of theory which contained the idea that when a country importsluxury goods, selling the most necessary or most useful commodities, itprospers, because it means that the people are able to produce beyond its basicrequirements.


The Absolute Advantage Theory

The British school of«classical economics» began in no small measure as a reaction againstthe inconsistencies of mercantilist thought. Adam Smith was the 18th-centuryfounder of this school; his famous work, «The Wealth of Nations», isin part an anti-mercantilist tract. In «The Wealth of Nations», Smithemphasized the importance of specialization: in a world where the productiveresources are scarce and human wants cannot be completely satisfied, eachnation should specialize in the production of goods it is particularly wellequipped to produce; it should export part of this production, taking inexchange other goods that it cannot so easily turn out.


Adam Smith

Adam Smith's attack was probablythe boldest one on the «mercantile system» which was alreadytottering both because economic changes had given some of these doctrines anantiquarian flavor and because the piecemeal invalidations of these doctrinesby the many forerunners of economic liberalism hardly left it a «leg tostand on». All the same, without Smith's vigurous, forceful, andsystematic statement of its weaknesses, it might have lingered much longer thanit did.

On the other hand, Smith wasunfortunately not capable of precisely formulating a general theory ofinternational trade. Apart from his building up an imposing structure ofarguments in favor of freedom from restrictions on foreign trade activities,his contributions to this theory are relatively minor, as Smith consideredmistaken that a producer needs an absolute advantage to export its products.

The basic concepts of Smith'steory of international trade may be considered the following:

1. The international commerce isclose related with the social division of labor.

2. The international trade afterSmith is based apon the freedom of action and the incentives of economicagents.

3. In international trade thecompetition is free and perfect (without monopolies and any governmentalrestrictions in the form of protectionist policies).

From these concepts the followingindications on international economic relations result:

1. In the result of labor divisionit is not necessary and even possible that every country produce inside all theproducts it needs. It is because different states are provided with the factorsof production of different types and quality in different proportions. As theresult every country must specialize in production of that goods, for which thecosts of production are the lowest.

2. Every country imports the goodsfor which it pays a lower price than it would cost him in case it produced thisproduct domestically.

3. The difference between thedomestic cost of production and the import price is the absolute advantageobtained through the international trade, this rule being general for allcountries.

4. At the domestic range the statemust not interfere in economy, as it always disturbs economic agents fromseeking the most efficient  mode to invest factors of production it posesses.

5. In the international trade mustbe promoted the policy of free competition (without monopolies) and a policy offree exchange (non-discriminating).

Much as Smith was aware of thebenifits 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 whichin his view justified the imposition of barriers on imports for the purpose ofencouraging domestic industry.

First, some particular industriesmay be necessary for the defense of a country. From this point of view, theBritish Navigation Acts, inasmuch as they promoted the building up of amerchant marine to be used in peace and war alike, were perfectly sensible.

The second case is an applicationof the principle that normally competitive conditions should not be distortedby government intervention. Consequently, it will be proper to place a burdenon foreign industry if this merely neutralizes the disadvantage under whichdomestic industry operates because it is burned with some taxes from which theforeign producers are exempt. After the imposition of a «matching»tariff duty, a form of equalizing adjustment no larger portion of domesticlabor and capital would be devoted to the particular domestic industry of acountry than what would naturally go to it. «It would only hinder any partof what would naturally go to it from being turned away by the tax, into a lessnatural direction...» Smith does not underrate the difficulty arising fromthe fact that imported commodities are seldom perfect equivalents of thedomestic produced variety.

Adam Smith took up two secondarycases in which he held it to be a «matter of deliberation» whether ornot 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 repealof 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 distinstlyin its favor, the "...transitory inconviniency of paying dearer during ashort time for some sorts of goods" would not be justified.

The second possibility, where theissue is not the imposition of a new tax but rather the return to free tradefrom the evils of protection, centers around the need of preventing a suddenpainful 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 deprivedof their ordinary employment and livelihood by the removal of high duties andprohibitions in some special regard to their welfare in order. Indeed, Smithfeels, it becomes a matter of equity in this case that the return to exposureto competition from foreigners be undertaken "...slowly, gradually, andafter a very long warning".

Bounties on exports, that is,government payments to exporters of goods who could not otherwise effectivelycompete with their foreign rivals, were, as we might expect, another device ofthe «mercantile system» scorned by Smith. They can only warp thenatural allocation of resources. Since a country cannot force the buying of itsexports on other countries, the next best expedient may be found in one countrypaying another for the buying of exports. But doing so, through bounties, willforce a country's trade in less advantageous channels than that  in which itwould go if left alone. Domestic consumers will be the losers: under conditionsof full employment they would pay a higher price for a smaller portion of thetotal supply, and in addition they would have to foot the bill for governmentpayments to exporters.

Such are the highlights of theattack on the absurdities of mercantilist restrictions, which had flowered toolong to suit Smith's disposition.


The Comparative Advantage Theory

Smithdid not expand these ideas at much length; but David Ricardo, the second greatclassical economist, developed them into the «principle of comparativeadvantage», a principle still to be found, much as Ricardo spelled it out,in every textbook on international trade.

The principle of comparativeadvantage is based on what kind of product the country can produce best, incomparing not with other countries, but with the producing of other kinds ofgoods. In this case the country doesn't necessarily need an absolute advantageto specialize in producing and exporting it.

The major purpose of the theory ofcomparative advantage is to illustrate the gains from the international trade.Each country can gain by specializing in those occupations in which it isrelatively efficient; it should export part of that production and take inexchange those goods in whose production it is, for whatever reason, at acomparative disadvantage. The theory of comparative advantage thus provides astrong argument for free trade — and indeed — for a laissez-faire attitude withrespect to trade.

The supporting argument is simple;specialization and free exchange among nations yield higher real income for theparticipants.

The act that a country will enjoyhigher real income as a consequence of the opening up of trade barriers doesnot mean, of course, that every family or individual within a country mustshare in that benifit. Producer groups affected by import competition obviouslywill suffer to at least some degree. Comparative-advantage theorists concedethat free trade would affect the relative income position of such groups, andperhaps even their absolute income level. But they insist that the specialinterests of these groups clashes with the total national interest, and themost that they are usually willing to concede is the possible need for atemporary protection against import competition, in order that the personsaffected may have sufficient time to move to another occupation.


David Ricardo

In his theoretical researchesD.Ricardo did not base apon extensive empirical researches but mainly engagedin abstract reasoning. In working out his international trade theory, he alsofounded his conclusions apon a set of postulates which he considered as firstapproximations of the real world. The conclusions he drew, being valid withinthe framework of his assumptions only, had of course to be modified before theycould be applied to actual circumstances.

The same is also true forJean-Stuart Mill, whose studies in international trade theory completed theframework built by Ricardo. In spite of many attacks and emandations, the mainstructure of the Ricardo-Mill theory of international trade remained basically unimpareduntill well into the 20th century.

He left however, much unfinishedbusiness for his successors, since his statements did not explain how theactual ratios of international exchange determine international prices.

Ricardohas been attacked on many grounds: his statement of the doctrine in terms oflabor costs only; his assumption of constant cost of production; and, ofcourse, his artificial assumptions of perfect factor mobility within a nationas against complete factor immobility internationally. Many feel that thesedemerits are minor and are overshadowed by the fact that his new approachopened up entirely new vistas for further research, for example, a restatementof the principle in terms of opportunity costs.


John Stuart Mill

Ricardo's contribution leftunanswered the question of how the actual ratios at which goods exchange aredetermined. It was Jean Stuart Mill who explained the determination of theterms of trade and did so with great skill. He found that they are dependent onreciprocal demand and that the equilibrum exchange ratio is the ratio thatequalizes the values of exports and imports for each country in a two-countrytwo-commodity situation. With the «Equation of International Demand»as a tool, he proceeded to envisage more complicated situations and explainwhat modifications in assumptions their analysis necessitated. His work helpedgreatly in clarifying the intricate problems connected with the theory ofinternational values and strengthened the foundations on which others couldbuild.

Among the other representatives ofclassical school we can pick up such economists as Nassau William, Senior, JohnElliot Cairness, the Irish one Charles Francis Bastable, whose apport indeveloping theory of international trade was, perhaps, the boldest, as theytried to modify the Ricardo-Mill theory in more realistic way.


This change of attitudes led tothe signing of a number of agreements embodying the new ideas, among them theAnglo-French Treaty of 1786, which ended what had been an economic war betweenthe two countries.

After Adam Smith, the basic tenetsof mercantilism were no longer considered defensible. This did not, however,mean that nations abandoned all mercantilist policies. Restrictive economicpolicies were now justified by the claim that, up to a certain point, thegovernment should keep foreign merchandise off the domestic market in order toshelter national production from outside competition. To this end, customslevies were introduced in increasing number, replacing outright bans onimports, which became less and less frequent.

Inthe middle of the 19th century, customs walls effectively sheltered manynational economies from outside competition. The French tariff of 1860, forexample, charged extremely high prices on British products: 60 percent on politiqueeconomique ig iron; 40 to 50 percent on machinery; and 600 to 800 percent onwoolen blankets. Transport costs between the two countries provided furtherprotection.

A triumph for liberal ideas wasthe Anglo-French trade agreement of 1860, which provided that French protectiveduties were to be reduced to a maximum of 25 percent within five years, withfree entry of all French products except wine into Britain. This agreement wasfollowed by other European trade pacts.

Resurgence of Protectionism

In the period of a whole triumph of the doctrine of classicaleconomic liberalism, in the first part of 19th century, there appears inGermany a diametrically contraire (at least apparently) doctrine of economicprotectionism. The brightest representative of this new theory is, no doubt,Friedrich List (1789-1846), son of a German leatherworker. Not studying at anyuniversity, he made an academic career to become active in German politics. In1819, 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 inno smaller measure appreciated and valued posthumously. Rare economists hadsuch a great influence upon the course of economic events as List had, thereare few systems of economic thought which were to such extend using in practiceas the Listien one was.

The economic and political unity that characterized much of Europein the first half of 19th century was totally absent from Germany. The peacetreaty that ended Germany's participation in Napoleonic wars left that countrydivided into 39 different states, most of which were individual monarchieseconomically and politically isolated from one another. Such isolation wasprimarily the result of a complex system of interstate tariffs that impairedthe free and easy exchange of goods. At the same time, however, no importduties existed. Thus British surplus products (and those of other countries)found their way into German markets, where they were offered at extremely lowprices.

Under these circumstances the very existence of Germanmanufacturing and mercantile interests was threatened, and by the 1830, therearose among the German states a general clamor for economic unity and uniformtariffs. It was this movement that consumed List's interests and energy.

In his analysis of national systems of political economy, Listapplied a method of inquiry originated by Saint-Simon: the idea that an economymust pass through successive stages before it reaches a «mature» state.The historical stages of development detailed by List were:

1. Barbaric

2. Pastoral

3. Agricultural

4. Agricultural-Manufacturing

5. Agricultural-Manufacturing-Commercial

Like Sismondi and Saint-Simon, List was as much interested intransition between stages of economic development as in the end result. He feltthat passage through the first three stages will be brought about most speedilyby free trade between states and nations, but that economies in transitionbetween the last two stages required economic protection until the final stagewas reached.

Free trade justified once again, however, when the final stage ofdevelopment was attained, «in order to guard against retrogression andindolence by the nation's manufacturers and merchants».

By List's classification and testimony, only Great Britain hadattained the final stage of economic development. While the Continental andAmerican nations struggled to reach this apogee, however, cheap British importswere thwarting the development of domestic manufacturing. List felt that untilall nations reached the final stage of development, international competitioncould not exist on an  equal footing. Thus he favored protective tariffs forGermany until its greatest national economic power was attained.

It is important to note that List was not an outrightprotectionist; rather, he felt that protection was warranted only at criticalstages in history. His writings are replete with examples borrowed from historyand experience showing that economic protection is the only way for an emergingnation to establish itself. List felt that the American experience offeredvindication of his views, and he of course found ready support among UnitedStates protectionists, particularly Alexander Hamilton and Henry Carey.


List's Criticism of Classical Economics

List strongly opposed the absolutist, cosmopolitian tendencies ofthe classical economists. They derived principles, he maintained, which werethen assumed to hold for all nations and all times. By contrast, List's theoryand methodology were strongly nationalistic and historical. His theory ofstages in economic development, for example, was calculated to demonstrate theinsufficiency of classical economics to recognize and reflect the variety ofconditions 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 freeinterchange will increase wealth (as demonstrated by the classical economists);he must also know the ramifications of such action for his own country. ThusList argued that free trade that displace either population or domesticindustry is undesirable. Moreover, List would not sacrifice the future for thepresent. He maintained that the crucial economic magnitude in economicdevelopment is not wealth (as measured by exchange values) but productivepower. In his own words, " The power of producing wealth is...infinitelymore important than the wealth itself". Thus economic resources must besafeguarded so that their future existence and development are assured. Thisview constitutes further justification for List's protectionist arguments; italso lies at the root of the popular «infant-industry» argument insupport of protective tariffs.

For List, the ultimate goal of economic activity should be nationaldevelopment and the accretion of economic power. In this, he (as Marx was to dolater) perceived industry as more than the mere result of labor and capital.Rather, he conceived industry as a social force that itself creates andimproves capital and labor. In addition to effecting present production,industry gives an impetus and a direction to future production. Therefore, Listrecommended the introduction of industry into underdeveloped countries even atthe expense of temporary loss.

List's originality in economic theory and method consisted in hissystematic use of historical comparison as a means of demonstrating thevalidity of economic propositions and in his introduction of new and usefulpoints of view in contradistinction to the economic orthodoxy of classicalliberalism. In stretching the dynamic fabric of classical economic growth byrepresenting economic development as a succession of historical stages, heprovided a methodological rallying point for the economists of the Germanhistorical school. Thus List may appropriately be considered the forerunner ofthat school.

This reaction in favor of protection spread throughout the WesternWorld in the latter part of the 19th century. Germany adopted a systematicallyprotectionist policy and was soon followed by most other nations. Shortly after1860, during the Civil War, the United States raised its duties sharply; theMcKinley Tariff Act of 1890 was ultra-protectionist. England was the onlycountry to remain faithful to the principles of free trade.

But the protectionism of the last quarter of the 19th century wasmild by comparison with the mercantilist policies that had been common in the17th century and were to be revived between the two World wars. Extensiveeconomic liberty prevailed by 1913. Quantitative restrictions were unheard of,and customs duties were low and stable. Currencies were freely convertible intogold, which in effect was common international money. Balance-of-paymentsproblems were few. People who wished to settle and work in a country could gowhere they wished with few restrictions; they could open businesses, entertrade, or export capital freely. Equal opportunity to compete was the generalrule, the sole exception being the existence of limited customs preferencesbetween certain countries, most usually between a home country and itscolonies. Trade was freer throughout the Western World in 1913 than it was inEurope in 1970.


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