Accounting Dictionary

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Mercantile System

Definition: The mercantile system is a system of managing the economy of a country through regulation of its foreign trade, with the goal of establishing a permanent positive balance of trade. This goal was accomplished by implementing the following trade tactics:

• High tariffs on inbound goods. By increasing the prices of inbound goods from other countries, it became more likely that purchases of goods from other countries would decrease.
• Subsidies on exports. The government paid subsidies to exporters, making it easier for them to lower their prices and sell more goods to other countries.
• Low internal labor costs. The cost of labor was kept low, which had the dual effect of leaving little money to buy expensive imports and making it less expensive to manufacture goods for export.
• Colonialism. Countries acquired territories overseas and set them up as colonies that were required to trade exclusively with their parent countries.

All of these tactics combined to create an environment where a country bought primarily from within its borders, while being as competitive as possible overseas.

Mercantilism was found to be an invalid system of thought for the following reasons:

• Not everyone can have a positive balance of trade; the system assumes that trading partners will have correspondingly large negative trade balances.
• The system encourages countries to produce all of their own goods, when in fact some countries have lower overall costs, and so should distribute their wares throughout the world.
• The cost of a country's currency would gradually increase along with its balance of trade, until it would reach the point of being too expensive for trading partners, who would not longer find it cost effective to buy goods from that country.
• Subsidies tend to be paid to those companies currently favored by the government, which smacks of favoritism.