An economic philosophy or doctrine which holds that a country grows rich by encouraging exports and discouraging imports. According to mercantilism, a trade surplus (exporting more than importing) is good for a country’s economy, while a trade deficit (the opposite) is bad. If mercantilism were correct, countries could run a trade surplus only if other countries ran trade deficits. Government officials who like this idea view other countries as potential threat to their own nation’s interest, seeing international trade as a zero-sum game (the gains of one country must come from losses imposed on other countries).
Today governments do not support genuinely free trade. Despite signing trade agreements to ostensibly capture the benefits of trade, large barriers still exist to the movement of goods around the globe. Because countries no longer use gold and silver as the common money, the rhetorical justification for trade restrictions today rests on “saving jobs” in the protected domestic industries (rather than the accumulation of physical wealth).
Economically speaking, there is nothing significant about the political boundary separating “foreign” goods from “domestic” goods. Just as an individual American trades with other Americans to obtain his food,
clothes, car repair, and medical services, there is nothing “uneconomical”
about the United States in the aggregate trading with Japan. To restrict the imports of cars from Japan in order to “create jobs” for American workers in Detroit, would be as nonsensical as a man refusing to go to a dentist in order to “create work” for his wife so that she has to be the one to clean his teeth and look for cavities.
Earlier we talked about the commonsense insight that individuals can enjoy a much higher standard of living if they specialize in one or a few activities, and trade their surplus production with others who have specialized in something else. The same logic applies to nations. Rather than producing everything domestically (i.e., within the geographical borders of the country), the people in each country are all enriched by the option of trading with people from other nations. Because of their different endowments of natural resources (e.g. oil, diamonds), different regions have an advantage in producing different goods. The tremendous differences among regions along natural, historical, and cultural dimensions, total world output is greatest when different regions specialize in their comparative advantages (wheat, cars, oil, oranges, etc.) and produce far more of these goods than their own residents want to purchase. The excess is then exported to other regions, which in return export their own excess goods. Although an individual country can run a trade deficit with another individual country, the world as a whole is always in a trade balance; individual deficits and surpluses necessarily add up to zero.
If we imagine an initial situations where an individual country decides to “protect” its domestic industries and “save jobs” by preventing foreign goods from crossing its borders, its residents would become much poorer. It is similar to a situation where people living in a particular village (or a house) would not be allowed to spend money buying things from anyone living outside of the village (or the household). The only reason why this rule would be less devastating for a country than for a household or a village is its population; the more people, the more goods and services to trade.