Economics (McConnell) AP Edition, 19th EditionChapter 37: International TradeOrigin of the Idea
While Adam Smith (1723-1790) saw the benefits to specialization and trade, he did not develop the theory of comparative advantage. Smith's theoretical contribution is known as the theory of absolute advantage. For absolute advantage to apply, each party involved in trade, in order to produce and export a good, would have to be the best, meaning that they could produce, at the lowest absolute cost, the good they were going to export. As explained in the text, David Ricardo (1772-1823) refined Smith's ideas into the concept of comparative advantage, where one could specialize and trade as long as they could produce at a lower relative cost (relative in terms of the other goods they could produce). Ricardo justified his theory using labor costs, specifically in terms of the number of labor hours needed to produce a unit of each good. In other words, a nation's comparative advantage depends on the productivity of the labor used to produce. The illustration of comparative advantage appearing in the text uses opportunity costs, an approach formulated by Gottfried Haberler in 1936. The superiority of Haberler's approach is that it allows for cost differences based on reasons other than relative labor productivity.
The case for erecting trade barriers heralds back to the days of mercantilism. The philosophy of mercantilism dates back to before economics was an established academic discipline. Although the ideas persist today, economists recognize the period from 1500 to 1776 as the era of mercantilist thought. During this period, independent states were coming together to form nations, and what we know as international trade was expanding rapidly. As European nations vied for preeminence in the world's political and economic structure, strong armies became a prerequisite for success. Building a strong army required a lot of money, and foreign trade was seen as the primary mechanism for accumulating gold and silver (the predominant currency of the time). The wealth of a nation, therefore, was measured by how much money a nation possessed. As Thomas Mun (1571-1641), an English merchant, wrote:
There is hardly a Society of Merchants, that would not have it thought the whole Prosperity of the Kingdom depends upon their single Traffic. So that at any time, when they come to be Consulted, their Answers are dark and partial; and when they deliberate themselves in Assemblies, 'tis generally with a byass, and a secret Eye to their own Advantage...And 'tis now to be apprehended, That they who stand possess'd of the ready Cash, when they discover the necessities of other People, will, in all likelihood, prompted by their Avarice, make a use of it very destructive to their Fellow-subjects, and to the King's Affairs, if not prevented by the Care and Wisdom of the State.(3) In the late 17th century, English law required that the dead be buried in woolen cloth. Recognizing the lost opportunity for export, Davenant stated: I have often wonder'd upon what Grounds the Parliament proceeded in the Act for Burying in Woollen: It Occasions indeed a Consumption of Wooll, but such a Consumption, as produces no advantage to the Kingdom. For were it not plainly better, that this Wooll made into Cloth, were Exported, paid for, and worn by the Living abroad, than laid in the Earth here at home. And were it not better, That the Common People (who make up the Bulk and are the great Consumers) should be bury'd in an old Sheet, fit for nothing else, as formerly, than is so much new Wooll, which is thereby utterly lost…. For it is the Interest of all Trading Nations whatsoever, that their Home-Consumption should be little, of a Cheap and Foreign Growth, and that their own Manufactures should be sold at the highest Markets, and spent Abroad; since by what is Consum'd at Home, one loseth only what another gets, and the Nation in General is not at all Richer; but all Foreign Consumption is a clear and certain Profit.(4) Perhaps the most famous mercantilist was Jean Baptiste Colbert (1619-1683). He served as the French minister of finance from 1661 to 1683 under King Louis XIV. So powerful was his influence in France that mercantilism there is known as "Colbertism." Colbert attempted to reform French law so as to promote both domestic trade and exports. Although not entirely successful in getting them enacted, some of Colbert's proposed changes are recognized for their value even today. Colbert advocated a uniform system of weights and measures and opposed internal tolls and local taxes. In these the church and nobility blocked his efforts, but he did succeed in improving the French infrastructure (roads, bridges, and canals), albeit using the conscripted labor of peasants. In order to protect consumers and ensure the quality of export goods, Colbert oversaw heavy regulation of production, and some businesses were subsidized or given a monopoly position to allow them to develop into exporting firms. Despite some of his more enlightened ideas, Colbert was immensely unpopular, especially among the peasant population. Other ideas of varying popularity, some of which are still associated with mercantilist thought, include a large, hard-working, and poorly paid population. Child labor was encouraged by imposing penalties on families that failed to put their children into the lace industry at age six. To promote population growth, tax exemptions were given for marrying early and having ten or more living children, where sons killed in military action were counted as living, but priests, nuns, and monks were not. Colbert canceled 17 holy days and attempted to reduce religious activity because he saw priests, nuns, and monks, as well as lawyers and government officials, as unproductive idlers. Although mercantilism as an economic philosophy has subsided since the days of Mun, Davenant, and Colbert, it is certainly not dead. Friedrich List (1789-1846), a German government official, advocated free domestic trade and high tariffs on imported goods. His interest was in protecting new domestic industries that were trying to become competitive. List's argument forms the basis for the infant-industry argument appearing in the text. Responding to those who would claim that tariffs reduce the amount of goods available for consumption, List wrote: It is true that protective tariffs at first increase the price of manufactured goods; but it is just as true … that in the course of time, by the nation being enabled to build up a completely developed manufacturing power of its own, those goods are produced more cheaply at home than the price at which they can be imported from foreign parts. If, therefore, a sacrifice of value is caused by protective duties, it is made good by the gain of a power of production, which not only secures to the nation an infinitely greater amount of material goods, but also industrial independence in case of war. Through industrial independence and the internal prosperity derived from it the nation obtains the means for successfully carrying on foreign trade and for extending its mercantile marine; it increases its civilisation, perfects its institutions internally, and strengthen its external power. (5) Despite what economists have learned over the past centuries of the value of free international trade, vestiges of protectionism hearkening back to the mercantilist era still remain to influence international trade policy.
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