<h2>CHAPTER 50</h2>
<h3>THE GENERAL THEORY OF INTERNATIONAL TRADE</h3>
<h4>§ I. INTERNATIONAL TRADE AS A CASE OF EXCHANGE</h4>
<div class="sidenote">The motive of individual gain in foreign trade</div>
<p>1. <i>International trade is exchange between individual men, and has the
same object as other exchange of goods.</i> The term international trade
should not be misunderstood as meaning that nations rather than
individuals engage in it. International trade differs from domestic
trade only in the fact that the parties are citizens of different
sovereign states. Exchanges between men in the same village, between
those in neighboring villages, and between those in different countries,
are prompted by essentially the same economic motive—the wish to
increase the want-gratifying power of goods. In every such case both
parties gain or think they are gaining. In international trade there is
the same chance for mistake as in domestic trade, but no more. In a
single transaction in either domestic or foreign trade one party may be
cheated, but the continuance of trade relations is dependent on
continued benefits. The once generally accepted maxim that the gain of
one in trade is the loss of another, is rarely applied now except to
international trade. The starting point for the consideration of this
subject is in this proposition: Foreign trade is carried on by
individuals, for individual gain, with the same motives and for the same
benefits as are found in other trade.</p>
<div class="sidenote">Natural differences affecting foreign trade</div>
<div class="sidenote">Political boundaries and trade</div>
<p>2. <i>As commerce has grown, the territorial division of labor has
correspondingly increased.</i> Although economic<span class="pagenum"><SPAN name="Page_481" id="Page_481">[Pg 481]</SPAN></span> motives have had
influence in political affairs and have helped to determine political
groupings and the limits of modern nations, there is to-day no very
close correspondence between political and economic boundary lines. Both
industrial and political conditions have changed so rapidly that the
lines often have tended to diverge rather than to agree. It is common
for two portions of a nation to exchange far less than do two portions
of entirely different nations. The great territorial divisions of
industry are determined first and mainly by differences of climate,
soil, and natural resources. Thus trade arises easily between north and
south, between warm and frigid climes, between new countries and old,
between regions sparsely and regions densely populated. Foreign trade
with distant lands is as old as history. In medieval times the luxuries
of the temperate zone were mostly articles produced in the tropics.
Political divisions usually have not been large enough to embrace widely
varied soils and climates, the Roman Empire being an exception in marked
contrast with the comparatively small political units of the Middle
Ages. Before modern methods of transportation, a large free federal
state like our republic was impossible. As in recent centuries the large
political units have been formed, the question has arisen, Shall the
political boundary be likewise the economic boundary marking the limits
of trade? The firm constitutional Union of the American states arose out
of difficulties with regard to trade. The German Zollverein, the
forerunner of the modern German Empire, had a similar origin. The
Australian Federation consummated within the last few years has grown
out of the need of adjusting tariffs and tariff boundaries. These larger
political units containing such varied resources can in larger measure,
but never completely, become independent of the rest of the world if
they will.</p>
<div class="sidenote">Differences in culture and industry</div>
<p>Territorial division of trade is determined secondly by differences in
the accumulation of wealth, in the development<span class="pagenum"><SPAN name="Page_482" id="Page_482">[Pg 482]</SPAN></span> of capital, of
invention, and of organization, in the degree of intelligence of the
workers, and in the grade of civilization. It is mainly trade due to
this second group of causes, and carried on between old and new
countries of about the same latitude, that is the subject of discussion
in economic treatises on international trade.</p>
<div class="sidenote">Comparative costs as between individual workers</div>
<p>3. <i>The doctrine of comparative costs is that relative, not absolute,
advantages of production determine for a country the benefits of
international trade.</i> The free-trade question in any country is whether
it is for its interests as a whole to permit trade between its citizens
and the citizens of other countries. The question appears especially
difficult where both countries have natural resources of about the same
character (as iron and coal in the case of England and America), and
where, therefore, both can produce the things that are exchanged. If
American labor can produce as much iron in a day as English labor,—or
more,—is it not foolish and wasteful, it is asked, not to produce that
wealth? Now, exactly the same case is presented in simple neighborhood
exchanges. The merchant may be able to keep his books better than does
the bookkeeper whom he employs. The proprietor may be able to sweep out
the store better than the cheap boy does it. The carpenter may be able
to raise better vegetables than can the gardener from whom he purchases,
and yet the merchant and the carpenter do not quit their better-paying
work and turn to clerking or to raising vegetables.</p>
<div class="sidenote">As between communities differing in advantages</div>
<p>It often happens that both countries can technically produce both the
articles that are internationally exchanged. It may frequently happen
that one of the two countries has an advantage in amount of sacrifice
and effort, as to both articles; but if the advantage is greater in one
article than in the other, the foreigners, like the low-paid clerk, will
be willing to exchange at a ratio that will make it profitable to
specialize in the product wherein the greater superiority lies.
Therefore not the advantage as to a single product, enjoyed by one
country over the other is most important<span class="pagenum"><SPAN name="Page_483" id="Page_483">[Pg 483]</SPAN></span> in determining whether to
produce at home or to exchange, but the comparative advantages enjoyed
in the production of the two articles in question.</p>
<div class="sidenote">Examples of comparative costs</div>
<p>It must be remembered that comparative cost as here used refers to cost
in effort, not to money cost,—a point on which there is often
confusion. The money cost of a certain product is often greater in a new
country because wages are high, and wages are high just because psychic
cost is low, that is, because labor can produce so much. At the time of
the great gold discoveries in 1849-50, the price of goods in California
was much higher than in the East, and much higher in Australia than in
Europe. A day's labor doubtless would produce as much food in Australia
and in California as in New England and in Norway, but it produced far
more gold. Hence butter and cheese were shipped by long routes from
Norway to Australia and from New England around Cape Horn to California,
to be exchanged for gold. One of the standing arguments against foreign
trade is based on the idea that a country cannot profitably import goods
unless it is at an absolute disadvantage in their production. It is
declared that as our country can produce these goods "as well" as
foreign countries (meaning with as few days' labor), there is a loss on
every unit imported.</p>
<div class="sidenote">Selection of the most paying industries</div>
<p>4. <i>The equation of international exchange is that adjustment of prices
which results in the equalizing of the imports and exports of the
country.</i> The superiority of a new country over an old one is not
equally great in every line of industry. It is almost certainly most
marked in those enterprises where natural resources are employed. To
compete with the older country in less favored industries, capital and
labor in the new are forced to take a lower rate than they can earn in
the more favored. Without any government supervision, therefore, but
simply through the choice of enterprisers seeking the best investment of
capital, industries are developed in which the country is either most
markedly superior or least inferior to its neighbors.</p>
<p><span class="pagenum"><SPAN name="Page_484" id="Page_484">[Pg 484]</SPAN></span></p>
<p>If the productive energies of men interchanged between industries and
between countries with perfect readiness, a perfect equilibrium of
advantage would everywhere result. In every country, in every
occupation, labor and capital of given quality and amount would receive
the same reward. But the interchange of labor and capital between
countries is never without friction. Adam Smith said that "a man is of
all sorts of luggage the most difficult to be transported." The higher
wages in a new country are sufficient to attract constantly from the
older lands a portion of their labor supply; the higher rate of interest
in the new countries attracts constant additions of capital; yet,
despite these forces working toward equalization, the inequality may
remain and through the working of other influences even increase in the
course of years.</p>
<div class="sidenote">Persistence of the differences</div>
<p>The laborers, enterprisers, and investors in the one country are thus in
a position of more or less enduring advantage relative to those of the
other countries. The advantage is sometimes said to be a "monopoly"
which they, or the country as a whole, enjoy; but in the absence of any
contractual limiting of competition, this is a misuse of the term
monopoly. This variation in the degree of scarcity of agents in
different territories is not peculiar to nations as a whole. Differences
of the same nature exist between the Northern and the Southern states of
the American Union, have continued for decades between Eastern and
Western states, and are found even between neighboring counties. The
differences between two countries, however, are likely to be more
marked, the circulation of factors being so active within a country that
it is allowable to speak broadly of prevailing national rates of wages
and of interest.</p>
<div class="sidenote">The ratio of international demand defined</div>
<p>Every exchange of goods between the countries is made at a ratio that
reflects, or expresses, this abiding difference in comparative costs.
The imports into the favored country represent regularly the results of
more units of labor of a given grade than do the corresponding exports.
The ratio<span class="pagenum"><SPAN name="Page_485" id="Page_485">[Pg 485]</SPAN></span> which expresses the disparity of advantage of productive
factors is called "the equation of international demand." This does not
mean that the money value of the imports exceeds that of the exports, or
vice versa. On the contrary, the equation itself embodies a maxim of
international trade that "in the long run," or "on the average," imports
and exports must be equal in value (<i>i.e.</i>, equation of demand). This
brings us to the theory of foreign exchanges, which is essential to an
understanding of this feature of international trade.</p>
<h4>§ II. THEORY OF FOREIGN EXCHANGES OF MONEY</h4>
<div class="sidenote">Purpose of foreign exchange</div>
<div class="sidenote">The rate of foreign exchange</div>
<p>1. <i>Foreign exchange of money is the purchase and sale of the right to
receive a given kind and weight of metal at a specified time and place.</i>
Par of exchange is the number of units of the standard coin of one
country that contain the same amount of fine gold (or silver) as the
standard coin of the other country. Usually the English pound is taken
as the basis in the tables which express the ratio of the gold in the
standard coins of different countries. The <i>gold shipping point</i> is par
of exchange plus or minus the cost of moving the actual metal; it varies
with means of transportation and communication. The par of exchange
between England and America being $4.866 and the cost of expressing and
insuring a gold pound between New York and London being approximately
.03, the shipping point for the export of gold from New York is $4.896.
At the upper and lower limits, there is a motive for shipping gold as a
commodity. If each transaction were independent of all others, the cost
of exchange would be the weight of metal called for, plus grains enough
more to pay for loss of interest, cost of freight, risk, and trouble. In
such a case it would cost $4.896 to remit one pound; while a debt of one
pound payable in London would at the same time be worth $4.836 to the
creditor in New York. When, in New York, a number of men having<span class="pagenum"><SPAN name="Page_486" id="Page_486">[Pg 486]</SPAN></span> bills
to pay in London meet a number of owners of bills receivable in London,
a market for London drafts is created and a rate of exchange results
somewhere between the shipping points. In this is the explanation of the
variation of the rate, and of the facts that the cost of outward
exchange sometimes is less than the par of exchange and that the value
of foreign drafts sometimes is above par.</p>
<div class="sidenote">Variation about par of exchange</div>
<p>The balancing of foreign exchanges is of essentially the same nature as
the domestic cancelation of indebtedness. It is going on constantly
between two merchants in the same town, between two banks in the same
town who represent groups of merchants, between men in neighboring
towns, between distant states like New York and California, and between
the trading nations of the world. The price of exchange to the
individual is reduced by the specializing of the business in the hands
of a few dealers, permitting cancelation of indebtedness or offsetting
of exchange, and greatly reducing the amount of bullion to be
transported. Exchange varies above and below par as conditions change.
When the movement of money is into the country, drafts on London are
bought and sold for less than par, for every pound draft thus remitted
to London reduces the need of shipping gold to this country, while every
London draft collected in New York at such a time increases the need to
ship gold.</p>
<div class="sidenote">The cash balance of international trade</div>
<p>2. <i>International shipment of money is always just the amount needed to
balance the accounts due.</i> The proposition that in the long run the
value of imports must equal the value of exports, while the fundamental
truth in the theory of international trade, must be understood in a
broad sense. Into the balance between the traders of two nations enter
many items: the cash values of the imports and exports of each;
freights, insurance premiums, and commissions; the expense of Americans
traveling in foreign lands, and the cost of the foreign service of this
government (such as the salaries of consuls and of diplomatic
representatives)<span class="pagenum"><SPAN name="Page_487" id="Page_487">[Pg 487]</SPAN></span> which count as the importation to America of an
equivalent amount of food, clothing, and sundry services; subsidies and
war indemnities to foreign nations representing, as they do, an
expenditure, which at the moment may be paid in coin, but which, as is
to be more fully explained, must be offset ultimately in some way by
exports.</p>
<div class="sidenote">Various credit items entering into the balance</div>
<p>Many credit transactions affect the balance one way or another until
settled. The loans made by European capital to the American government
or to individuals and corporations in America, as well as the European
capital expended in purchasing American enterprises, require the
remitting of gold to New York, and thus offset many imports of goods to
New York otherwise calling for the remitting of gold to London. In the
direction opposite to this, act the interest payments and the eventual
repayment of the principal loan, for these require either money or goods
to be exported from America to the value of the obligations. Loans that
run for years thus offset annually (in their accruing interest) a
portion of the exports of the debtor country. An excess of exports may
therefore at any given moment indicate either that the country is in
debt or that it is getting out of debt. An excess of exports is
generally looked upon as an evidence of national prosperity; but it is
absolutely inconclusive on the point. Finally, after all the items of
imports and credit paper purchased abroad are set opposite the items of
exports and promissory papers sold abroad, the balance is paid in gold
bullion and is shipped one way or the other. Evidently the amount of
gold shipped is but a small fraction of the total volume of
transactions.</p>
<p>Industrial indebtedness is represented in various forms: bills of lading
for goods shipped, drafts made by the creditor on his debtor for goods
shipped or property sold, checks or letters of credit of travelers,
bonds and notes public and private. These are the objects dealt in by
the bankers who are the agents to carry on the work of exchange.</p>
<div class="sidenote">Relations of the international flow of goods to the flow of
money</div>
<p>3. <i>The territorial distribution of money is both a determined<span class="pagenum"><SPAN name="Page_488" id="Page_488">[Pg 488]</SPAN></span> and a
determining factor in international trade.</i> It appears to be determined
in that the balance of all accounts for or against the country must be
settled eventually in money. After any such a settlement one country has
less, the other more money than before. The change in the amount of
money at once reacts on prices and becomes a determining factor in
international trade. The flow of money out of a country causes money to
tighten, interest rates on short loans in the large cities to stiffen,
and prices slightly to fall. When prices fall, imports decline, as the
country is not so good a place to sell in; when prices rise, imports
increase, as it is a better place to sell in. As the opposite effect is
produced on exports, there occurs immediately a change in the quantity
of money which continues until the national credits and debits balance
and for a brief time remain in equilibrium. If the trade of a country
with its neighbors continued long to give a balance of imports of goods
and of debit items (exclusive of money) it would ultimately be drained
of all its coin, and would default payment or cease to import. If the
trade constantly gave a balance of exports and credit items, money would
continue to flow in, until prices rose to unexampled heights. In fact no
such extreme is even remotely approached, for a slight movement of money
in either direction at once influences prices and sets in motion
counteracting forces. Decade after decade the circulating medium of
leading countries changes only slightly in amount, and the fluctuations
during periods of so-called "favorable balance of trade" and of
"unfavorable balance of trade" represent only the smallest fraction of
the value of goods passing through the ports of the country.</p>
<h4>§ III. REAL BENEFITS OF FOREIGN TRADE</h4>
<div class="sidenote">Fallacious explanations of the gains from foreign trade</div>
<p>1. <i>The direct advantages of foreign trade consist in the increased
efficiency it imparts to productive forces.</i> In explanation of the
advantages of foreign trade it is said to be<span class="pagenum"><SPAN name="Page_489" id="Page_489">[Pg 489]</SPAN></span> a vent for surplus
production and to give a wider market to what would otherwise go to
waste. This involves the same fallacy as the "lump of labor," the
destruction of machinery, and the praise of luxury. If backward nations
now give a vent for products which would otherwise rot in the
warehouses, at length a time will come when the world will have an
enormous surplus unless neighboring planets can be successively annexed.
Again it is said that the great purpose of foreign trade is to keep
exports in excess of imports so that money may constantly increase in
amount. The ideal of such theorists is an impossible condition where the
country would constantly sell and never buy. In the commercial view the
sole object of foreign trade is to afford a profit to the merchants,
regardless of the welfare of the mass of the citizens.</p>
<div class="sidenote">The real advantages of foreign trade</div>
<p>The main advantage of foreign trade is the same as that of any other
exchange. It is hardly necessary to review the explanation here: the
increased efficiency of labor when it is applied in the way for which
each country is best fitted; the liberation of productive forces for the
best uses; the development of special branches of industry with
increasing returns; the larger scale production with resulting greater
use of machinery and with increased chance of invention; the destruction
of local monopolies.</p>
<p>The moral and intellectual gains of foreign commerce were formerly much
emphasized. Commerce is an agent of progress; it stimulates the arts and
sciences; it creates bonds of common interest; it gives an understanding
of foreign peoples and an appreciation of their merits; it raises a
commercial and moral barrier to war; and it furthers the ideal of a
world federation, the brotherhood of man.</p>
<div class="sidenote">Conflict between general and special interests</div>
<div class="sidenote">Prevalence of protective tariffs</div>
<p>2. <i>Free foreign trade thus has in its favor the presumption of
advantage to the citizens; but various interests may be adversely
affected.</i> The general attitude of economic students for a century and a
half has been favorable to a large measure of freedom in foreign trade.
But the actual<span class="pagenum"><SPAN name="Page_490" id="Page_490">[Pg 490]</SPAN></span> practice of nations is opposed to the principles laid
down by the philosophers and accepted by nearly all serious students of
the question. Germany adopted very restrictive measures under Bismarck
in 1879 and by a recent law has discouraged trade still further. France,
Italy, and other smaller nations of Europe have strong protective
tariffs. The United States has followed a restrictive policy for the
last century almost unvaryingly. The explanation of this contradiction
is not entirely simple. Free trade is not the most desirable thing for
every one. Great interests are affected by foreign trade and certain of
these interests are able to dominate legislation. The general
proposition of free trade between nations, as advocated by most
economists since Adam Smith, is rejected by a majority of the people, by
the politicians, and by the legislators.</p>
<hr class="chap" />
<p><span class="pagenum"><SPAN name="Page_491" id="Page_491">[Pg 491]</SPAN></span></p>
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