History of Foreign Trade until the 20th Century

Although foreign trade was an important part of ancient and medieval economies, it acquired new significance after about 1500. As empires and colonies were established by European countries, trade became an arm of governmental policy.

Emergence of Modern Foreign Trade

Although foreign trade was an important part of ancient and medieval economies, it acquired new significance after about 1500. As empires and colonies were established by European countries, trade became an arm of governmental policy. The wealth of a country was measured in terms of the goods it possessed, particularly gold and precious metals. The objective of an empire was to acquire as much wealth as possible in return for as little expense as possible. This form of international trade, called mercantilism, was commonplace in the 16th and 17th centuries.

International trade began to assume its present form with the establishment of nation-states in the 17th and 18th centuries. Heads of state discovered that by promoting foreign trade they could mutually increase the wealth, and thus the power, of their nations. During this period new theories of economics, in particular of international trade, also emerged.

Early Advantages of Trade

In 1776 the Scottish economist Adam Smith, in The Wealth of Nations, proposed that specialization in production leads to increased output. Smith believed that in order to meet a constantly growing demand for goods, a country’s scarce resources must be allocated efficiently. According to Smith’s theory, a country that trades internationally should specialize in producing only those goods in which it has an absolute advantage—that is, those goods it can produce more cheaply than can its trading partners. The country can then export a portion of those goods and, in turn, import goods that its trading partners produce more cheaply. Smith’s work is the foundation of the classical school of economic thought.

Half a century later, the English economist David Ricardo modified this theory of international trade. Ricardo’s theory, which is still accepted by most modern economists, stresses the principle of comparative advantage. Following this principle, a country can still gain from trading certain goods even though its trading partners can produce those goods more cheaply. The comparative advantage comes if each trading partner has a product that will bring a better price in another country than it will at home. If each country specializes in producing the goods in which it has a comparative advantage, more goods are produced, and the wealth of both the buying and the selling nations increases.

Source: “Foreign Trade” Microsoft® Encarta® Online Encyclopedia

See Also

Commerce
Free Trade
World Trade Organization
General Agreement on Tariffs and Trade resources
Trade Dispute
Foreign Law Guide (FLG)
General Agreement on Tariffs and Trade
Trade law
Department of Foreign Affairs
Foreign law resources
Tariffs
Tariffs in the United States
History of Trade Unions