Mercantilism or Free Trade for Industrialization?

mlp · Jan 31, 2014

Let's talk about a hypothetical situation where there is a government-organised industrial development(leading to possible Industrial Revolution).
In such a case, would it be better for the government to implement mercantilism or free trade? why so?
*Meiji Japan is a good example except that it was forced to keep its tariffs low for several decades.
*If we are to assume several things before making the choice between the two, please state what we should assume.

Thespitron 6000 · Jan 31, 2014

What resources does the country have?

mlp · Jan 31, 2014

Thespitron 6000 said:
What resources does the country have?

porcelain, ginseng, textiles, wooden furniture, some local food products.
on natural resources, plenty of coal and iron ore, along with a lot of gold up the mountainous regions.

anotherlurker · Jan 31, 2014

zeppelinair said:
Let's talk about a hypothetical situation where there is a government-organised industrial development(leading to possible Industrial Revolution).
In such a case, would it be better for the government to implement mercantilism or free trade? why so?
*Meiji Japan is a good example except that it was forced to keep its tariffs low for several decades.
*If we are to assume several things before making the choice between the two, please state what we should assume.

both.

mercantilism domestically to protect your market from foreign goods.

free trade externally to export your own produced goods to foreign lands, if necessary enforced by big guns.

on top of that some land grabs to get free resources to fuel the economy.

Widukind · Jan 31, 2014

anotherlurker said:
both.

mercantilism domestically to protect your market from foreign goods.

free trade externally to export your own produced goods to foreign lands, if necessary enforced by big guns.

Er... that's pretty much mercantillism you're describing. The whole idea of that system is to put up tarriffs and other barriers to prevent foreign impots, and using the money to subsidize your own manufactures, industry and export. The desired result is to see lots of production in and export from your nation, while foreign money (gold and silver) flows into your country.

Mercantillism never involves limiting your own exports.

SPOILER: mercantillism actually doesn't work in the long term. There's a reason Britain got rid of it and adopted free trade policies: those were more profitable. With mercantillism, you're keeping out cheaper competitors by artificially keeping prices high, which ultimately damages your economy, and offsets all the perceived benefits of protectionism....

...however:

zeppelinair said:
Let's talk about a hypothetical situation where there is a government-organised industrial development (leading to possible Industrial Revolution).

If the government itself is organizing the industrial development, it will need a lot of revenue. This can be gained through domestic taxes or through tarriffs, and the latter are the more attractive option. In part because taxing your own economy will drive up prices, and make you less competitive. Combine that with free trade, and foreign rivals will flood your markets with their cheap imports.

So in this particular scenario, you need to raise tarriffs, and use those to finance your government program of industrialization. In the long term, however, the government will need to cut back on the subsidies and lower the tarriffs, embracing free trade (lest it suffer an economic downturn due to ridiculously high domestic prices and an uncompetitive international position).

So... pretty much what Britain did in the late 18th and early 19th centuries.

anotherlurker · Jan 31, 2014

Widukind said:
SPOILER: mercantillism actually doesn't work in the long term. There's a reason Britain got rid of it and adopted free trade policies: those were more profitable. With mercantillism, you're keeping out cheaper competitors by artificially keeping prices high, which ultimately damages your economy, and offsets all the perceived benefits of protectionism....

i was thinking along 1850 terms, free trade was only for exports back then, and if they dont like free trade, ... opium war n+1.

besides, protectionism has another nice benefit - it keeps hordes of low skilled people employed.

Widukind · Jan 31, 2014

anotherlurker said:
i was thinking along 1850 terms, free trade was only for exports back then, and if they dont like free trade, ... opium war n+1.

Very true about the opium wars, but the whole thing about "free trade" was that is was not just for exports. Mercantillist nations were always big on free exports; it was the imports they wanted to limit. The basic reasoning being: products go out, gold & silver flow in, the country gets rich.

Then the free trade movement emerged (Adam Smith, James Mill, etc.) and demonstrated that free trade (both ways!) between nations is more efficient (and also that you don't need to control a territory politically in order to make a profit from it... as long as it allows free trade... hence: opium wars to "open up" China's borders. Well. No one said Britain was nice to other countries...)

anotherlurker said:
besides, protectionism has another nice benefit - it keeps hordes of low skilled people employed.

Yes. But by having them do work that could more effectively be done elsewhere, thus creating inefficiency and driving up prices. The consumer effectively pays extra to keep those "hordes" employed. In fact... those low-skilled workers are also consumers, and themselves pay inflated prices, caused by the fact that they are kept employed via protectionism.

Adam Smith would argue that doing away with the protectionism would drive down prices, which would benefit the economy, and lead to more jobs for those same low-skilled workers.

(I don't necessarily agree, but it does demonstrate that protectionism always has its drawbacks, mainly due to hidden costs.)

anotherlurker · Jan 31, 2014

Widukind said:
Yes. But by having them do work that could more effectively be done elsewhere, thus creating inefficiency and driving up prices. The consumer effectively pays extra to keep those "hordes" employed. In fact... those low-skilled workers are also consumers, and themselves pay inflated prices, caused by the fact that they are kept employed via protectionism.

Adam Smith would argue that doing away with the protectionism would drive down prices, which would benefit the economy, and lead to more jobs for those same low-skilled workers.

(I don't necessarily agree, but it does demonstrate that protectionism always has its drawbacks, mainly due to hidden costs.)

either the consumer pays some "extra" to keep them employed or the consumer pays "fully" their unemployment money through taxes.
also, protectionism doesnt rule out efficiency advancements - you're still competing against other countries in exports.

(imo, calling economics a science is an insult to the real sciences.)

edit: i assume there's always someone who doesnt play according to the free trade rules, today most notably germany, japan and china, in that order.

Widukind · Jan 31, 2014

anotherlurker said:
either the consumer pays some "extra" to keep them employed or the consumer pays "fully" their unemployment money through taxes.

As I said, the free trade advocates believed that free trade would increase employment. Wether that's always true can be debated, but that was their reasoning.

anotherlurker said:
also, protectionism doesnt rule out efficiency advancements - you're still competing against other countries in exports.

Never said it did. But free traders, again, believed that open borders would be good for the exchange of new ideas and technologies. Which would in turn speed up innovation. In that regard they certainly seem to have been right.

anotherlurker said:
(imo, calling economics a science is an insult to the real sciences.)

I don't recall claiming that the study of economics is a (hard) science, as such. But it all depends on your definition of "science." Let's not open that whole can of worms.

mlp · Feb 2, 2014

Widukind said:
...
So in this particular scenario, you need to raise tarriffs, and use those to finance your government program of industrialization. In the long term, however, the government will need to cut back on the subsidies and lower the tarriffs, embracing free trade (lest it suffer an economic downturn due to ridiculously high domestic prices and an uncompetitive international position).
...
So... pretty much what Britain did in the late 18th and early 19th centuries.

were all colonial empires like this, such as the Netherlands or Portugal? were there "old empires" who upheld mercantilism? can government revenue being focused on trade alleviate the financial pressure on the peasants if taxation was previously based on the farming class?

Vingilótë · Feb 3, 2014

Infant industrism - Basically mercantilism, but with an eye towards eventually integrating into the global economy, which necessitates the implementation of free trade at some point in the future.

eliphas8 · Feb 3, 2014

Depends what they want. Protectionism protects dometic production from being outcompeted by foreign imports and is generally better for societies in the process of industrialization for most of history (until recently when transportation became cheap enough that production moved overseas as well), free trade is generally better for a nation who's production is already ahead of it's neighbors so it can compete in their markets.

mlp · Feb 3, 2014

eliphas8 said:
Depends what they want. Protectionism protects dometic production from being outcompeted by foreign imports and is generally better for societies in the process of industrialization for most of history (until recently when transportation became cheap enough that production moved overseas as well), free trade is generally better for a nation who's production is already ahead of it's neighbors so it can compete in their markets.

how would this fit into import substitution? was this the method Meiji Japan pursued?