QUESTION1: Background: Provide background information and the most relevant facts. Isolate the issues.??

34 Part One The lira-"on; orinre'rrmrlonui Trade Case Study N-"lGI'Ctllllllismi Older 'I'I'tan Smith and .--"\\li\\.-'t' Today Mercantllism was the philosophy that guided European thinking about international trade in the several centuries before Adam Smith published his Wealth of Notions in 1776. Mercantilists viewed inter- national trade as a source of major benets to a na- tion. Merchants engaged in trade. especially those selling exports. were goodhence the name mercan- tilism. But mercantilists also maintained that govern ment regulation of trade was necessary to provide the largest national benefits. Trade merchants would serve their own interests and not the national interest. in the absence of government guidance. A central belief of mercantillsm was that national well-being or wealth was based on national holdings of gold and silver (specie or bullion}. Given this view of national wealth. exports were viewed as good and imports (except for raw materials not produced at home} were seen as bad. If a country Sells (exports) more to foreign buyers than the foreigners sell to the country (the country's imports). then the foreigners have to pay for the excess of their purchases by ship- ping gold and silver to the country. The gain in gold and silver increases the country's well-being. accord- ing to the mercantilist belief. imports are undesirable because they reduce the country's ability to accumu- late these precious metals. lmports were also feared because they might not be available to the Country in time of war. in addition, gold and silver accruing to the national rulers could be especially valuable in helping to maintain a large military for the country. Based on mercantilist thinking. governments (1) imposed an array of taxes and prohibitions designed to limit imports and (2} subsidized and encouraged exports. Because of its peculiar emphasis on gold and silver. mercantilism viewed trade as a zero-sum activityone country's gains come at the expense of some other countries. since a surplus in international trade for one country must be a decit for some otherls). The focus on promoting exports and limiting imports also provided major benefits for domestic producer interests {in both exporting and import- competing industries]. Adam Smith and economists afteir him pointed out that the mercantilists' push for more exports and fewer imports turns social priorities upside down. Here are the key points that refute mercantilist thinking: - National well-being is based on the ability to con some products (and other \"goods\" such as leisure and a clean environment) now and in the future. Imports are part of the expanding national con- sumption that a nation seeks. not an evil to be suppressed. - The importance of national production and exports is only indirect: They provide the income to buy products to consume. Exports are not desirable on their own; rather, exports are useful because they pay for imports. - Trade freely transacted between countries gener- ally leads to gains for all countriestrade is a positive-sum activity. In addition. even the goal of acquiring gold and silver can be self-defeating if this acquisition expands the domestic money supply and leads to domestic inf tion of product pricesan argument first expoun by David Hume even before Smith did his writing Although the propositions of the mercantil have been refuted. and countries no longer focus piling up gold and silver. mercantilist thinking is ve much alive today. it now has a sharp focus on employment. Neo-mercantlllsts believe that exports are good because they create iobs in the country. Imports are bad because they take jobs from the country and give them to foreigners. Neo- mercantilists continue to depict trade as a zero-sum activity. There is no recognition that trade can bring gains to all countries (including mutual gains in employment as prosperity rises throughout the world]. Mercantilist thinking, though misguided. still pervades discussions of international trade in coun- tries all over the world. DISCUSSION QUESTlON Propanents of national competitiveness focus on whether our country is winning the battle for global market share in an industry. is this a kind of mercan- tilist thinking? Why or why not