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Mercantilism & protectionism

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We cannot increase national wealth by trying to skew the terms of international trade in our favour. Trade benefits us all, because differences in natural resources, the skills of the populace, costs of labour, and other comparative advantages mean that some products can be more efficiently produced in one country and exported to another than they can be produced in that second country.

Each country hopes to profit and increase national wealth through sales of export goods. But no country can export to another that does not have the means to buy its products. The export of goods provides the means by which we can pay to import those goods that can be produced more efficiently (or at all) overseas. And conversely, the export of other countries' goods to us provides the means by which they can buy our exported goods.

The creation of barriers to free trade, such as import or export taxes, and export or production subsidies, reduces the benefit we can gain from trade. It inhibits wealth creation in the short-term, and destroys wealth in the long-term.

Persistent trade imbalances are a sign that governments are intervening to prevent balance from being restored. Without intervention, balance will be restored naturally through changes to the exchange rate between nations with separate currencies or (slower and more painfully) through relative adjustments of wages and other prices between nations that share a single currency (i.e. in the absence of exchange-rate adjustments, wages and prices must fall relatively in countries with a persistent trade deficit, and rise relatively in countries with a persistent trade surplus)

By maintaining production of and demand for certain goods at an unsustainable level, such intervention to prevent trade from balancing encourages malinvestment, a harsher correction than necessary when the imbalance can no longer be sustained, and ultimately destroys wealth.



Dr. Radut Consulting