CHAPTER VI

THE REAL ADVANTAGES OF FOREIGN TRADE

§ 1. Critique of Old Ideas of Advantages of Foreign Trade.

THE mercantilists, whose maxims in political economy were accepted and acted on by all the nations of Europe up to the time of Adam Smith, laid an exaggerated stress on the value to a nation of its foreign trade. In opposition to this view Adam Smith insisted on the greater advantage in itself of the home trade, and showed that some of the principal advantages claimed for foreign trade were illusory, e.g. the acquisition of gold and silver by means of a favourable balance of trade. The refutation of the favourable balance theory-that the advantage of foreign trade was to be measured by the money balance due for the excess of exports over importswas so complete that its success has been admitted by the strongest writers on the protectionist side (e.g. Cournot).1

So insistent indeed is Adam Smith on the

1 66 'By an admirable piece of dialectics, full of vigour and flexibility, Smith utterly ruined the system known as the balance of trade which can no longer be sustained."-Cournot, Mathematical Principles of the Theory of Wealth, p. 164 (translation).

advantages of the employment of the capital of a nation at home that it might be thought the logical outcome of his argument would be a kind of Chinese isolation.

Apart from other reasons, however, he was well aware from the teachings of history, that England had gained enormously by the expansion of foreign trade, and he never held any theory which would not bear the test of experience.

It is true that all foreign trade involves the export of a certain amount of capital, but Adam Smith tried to show that if such export took place under natural conditions that is to say, without any artificial encouragement as by bounties or monoplies of various kinds the resulting trade would in general be of advantage to the nation.

§ 2. The Natural Preference of Home to
Foreign Trade.

The fundamental position in this proof is that capital naturally seeks employment at home in preference to any foreign employment, and that it is only when the home channels are filled up that there will be an overflow of the surplus abroad. "Each of these different branches [of foreign trade] is not only advantageous but necessary and unavoidable, when the course of things, without any constraint or violence, naturally introduces it." The term "naturally" is suggestive of an a priori appeal to the system of natural liberty, but Adam Smith does not rely on any such appeal; he

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advances purely economic arguments founded on experience.

§ 3. Export of Surplus Produce Advantageous.

"When the produce of any particular branch of industry exceeds what the demand of the country requires, the surplus must be sent abroad, and exchanged for something for which there is a demand at home. Without such exportation, a part of the productive labour of the country must cease, and the value of its annual produce diminish. The land and labour of Great Britain produce generally more corn, woollens, and hardware than the demand of the home market requires. The surplus part of them, therefore, must be sent abroad and exchanged for something for which there is a demand at home. It is only by means of such exportation that this surplus can acquire a value sufficient to compensate the labour and expense of producing it. The neighbourhood of the sea-coast and the banks of all navigable rivers are advantageous situations for industry only because they facilitate the exportation and exchange of such surplus produce for something else which is more in demand there." In this way arises the direct foreign trade of consumption.

Again: "When the foreign goods which are thus purchased with the surplus produce of domestic industry exceed the demand of the home market, the surplus part of them must be sent abroad again and exchanged for something more in demand at home." 2

England, for example, it is shown, imports from Virginia and Maryland about seven times as much tobacco as there is a demand for in the English markets. If, then, the six-sevenths could not be sent abroad and exchanged for something more in demand at home, the importation of that part must cease, and with it the productive labour of all the people of Great Britain who are employed in making the goods to pay for the tobacco imported. "The most roundabout foreign trade of consumption, therefore, may upon some occasions be as necessary for supporting the productive labour of the country and the value of its annual produce as the most direct.'

Finally, we have the advantage, admitted under natural conditions, of the development of the carrying trade. "When the capital stock of any country is increased to such a degree that it cannot be all employed in supplying the consumption and supporting the productive labour of that particular country, the surplus part of it naturally disgorges itself into the carrying trade, and is employed in performing the same offices to other countries."

The carrying trade that arises in this way under natural conditions is the natural effect and symptom of great national wealth; but it does not seem to be the natural cause of it. Those statesmen who have been disposed to favour it with particular encouragement seem to have mistaken the effect and symptom for the cause. "Holland, in proportion to the extent of the land and the number of its inhabitants by far the richest country in Europe, has, accordingly, the

greatest share of the carrying trade. England, perhaps the second richest country in Europe, is also supposed to have a large share in the carrying trade, though probably some of it is more properly regarded as a roundabout trade of consumption." "

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§ 4. Export of Surplus Capital Advantageous.

The example of Holland shows that capital may accumulate so rapidly and to such an extent that all the channels of trade are filled (even those of the carrying trade), and the country is obliged to export part of its capital abroad for foreign investment. "In the late war," says Adam Smith, "Holland gained the whole of the carrying trade of France," and yet the Dutch had such a redundancy of capital that they advanced loans to states and to private people in foreign parts at a rate of interest higher than that obtainable in Holland.2 Adam Smith points out that some people in his day argued that the trade of Holland was decaying because the rate of profit was falling, but the true cause he suspected lay in the abundance of its capital. It was said that the Dutch at the time held forty millions of the English funds.

The case of Holland at the time of Adam Smith is very similar to that of England under present conditions. A large part of our capital is engaged in shipping, and a considerable amount in the pure carrying trade. But a still larger part is invested abroad or lent to foreign countries in public and private loans.

1 Book II. chap. v.

2 Book I. chap. ix.