International Trade

Appendix II.

International Trade.

SECTION I.

THE MERCANTILE SYSTEM.

The principal peculiarities of the so-called mercantile system depend on a five-fold over-estimation: of the density of population, of the quantity of money, of foreign commerce, of the industries concerned with the transformation of materials (Verarbeitungsgewerbe), and of the guardianship of the state over private industry. All these tendencies are very intelligible, and almost self-evident, in a sovereign city-economy (Stadtwirthschaft) as opposed to the governed and worked-out (ausgebeuteten) country districts; as they are found even in the city-republics of later medieval times. But they are also natural in whole national economies, during that period of youthful and rapid growth in which the increasing density of population continues still, for a long time, to be really only a spur and an assistance, and in which, therefore, there can be no expression of anxiety concerning over-population; in which the new and rapidly growing division of labor draws attention particularly to the market-side of all businesses and to the circulation of goods; in which the progress from trade by barter to trade by money necessarily makes the volume of money needed even relatively greater; but especially are they natural in that world-period in which foreign trade suddenly increased enormously in consequence of the discovery of the whole earth; when the citizen classes of the people assumed immense importance as compared with the landed and clerical aristocracy, and when, in the internal affairs of state absolute monarchy, and in foreign politics, the system of equilibrium, through the instrumentality of the great compact-formation of states prevailed.

All these tendencies are most intimately connected with one another. If precious metal-money be really the essence of national wealth, a people who possess no gold and silver mines themselves; for instance, Italy, France and England, can become richer only through foreign trade, by means of a favorable balance produced by a preponderance of their exports over their imports; and only inasmuch as this excess is balanced by a payment in money from foreign parts. And so, too, in foreign trade, one nation can gain only what another nation has lost. Gain is promoted not only by direct obstacles placed in the way of the exportation of the precious metals, but still more by the value-enhancement of the exported commodities, and by the value-diminution of the imported commodities. And as commodities which have undergone the process of transformation are, on an average, more valuable than raw materials, the state can best carry out this policy by import duties, import prohibitions, and export premiums on manufactured articles, as well as by export duties, export prohibitions and import premiums on raw materials. This is extremely necessary against those nations who are superior to others in culture, wealth, the cheapness of labor and capital; and hence the envy of the mercantilists was directed chiefly against Holland, and after Colbert's time also against France. Such commodities as are not at all adapted to the nature of a country, because of its climate, for instance, the nation should produce at least in colonies of its own, that it might, in this way, emancipate itself from foreign countries. As the clear distinction drawn to-day between money and capital has asserted itself only since Hume's time, the notion that prevailed for centuries, that much money, much trade and a large population mutually conditioned one another, was a very natural one.

The younger and more refined conception of the mercantile system is distinguished from the coarse Midas-believing one, by two tendencies especially:

A. By the more thorough consideration of the balance of trade and the consequent limitation of the traditional supposition, that the excess of exports over imports would be always made up in cash money.

B. By the extension of the field of view, so that not only the direct but also the indirect and more remote effects of international trade were taken into consideration.

A certain over-estimation of the circulation of goods continued to characterize even the latest adherents of the mercantile system. Yet the caricature drawn by the tradition of more recent text-books, of the mercantilists, is true only of the inferior ones among them. The most distinguished of them, Botero, for instance, approximate more closely to the science of the present day than is usually supposed.

SECTION II.

REACTION AGAINST THE MERCANTILE SYSTEM.

The reaction against the mercantile theory of the balance of trade, which reached its height in Adam Smith, was based principally upon the following considerations:

A. Precious-metal-money is a commodity like all other commodities, and therefore useful only for certain purposes. It is as little to the wealth-interest of a people, by means of a continually favorable balance, to import infinite quantities of the precious metals, as it is to its power-interest, by means of its commercial policy, to accumulate infinite stores of powder. The person who possesses other exchangeable goods will be as well able, in case of need, to obtain gold and silver therewith as to obtain powder. We part with no capital when we export the precious metals and import other commodities instead; we simply exchange thereby one form of capital for another. The notion that the gain in trade is coincident with the balance of account paid in cash, is just as palpably false in the trade among nations as in trade among private persons. It would be a decided hardship to most men, if they were to receive payment at once in money for all that they possessed: and the nation is made up of individuals. And even the reasons which make payments in cash more uniformly desirable, in the case of private persons not engaged in mercantile pursuits, cease in the case of whole nations.

B. But a continual over-balance (Ueberbilanz) is not at all possible. Every relative increase of the amount of money must enhance the price of commodities, lower the value of money, and thus produce an exportation of money until a restoration of the level with other countries. The prohibitions of the exportation of money, so often resorted to, can avail nothing, because the precious metals are among the specifically most valuable goods; and because it is easier yet to smuggle them out of a country than to smuggle them into it.

C. The signs by which the mercantile system supposed it could estimate the favorableness of the balance of trade are essentially deceptive. We cannot, for instance, from the course of exchange, determine whether the payments made by us to foreign countries have been made for purchases, to absentees, etc., or as loans; and yet, according to the mercantilists, the latter are as useful to us as the former are injurious. And even the most accurate tariff-record (Zollregister) of the exportation and importation of commodities affords no guaranty that, in many instances, the rendering of the counter-value may not remain absent, by reason of bankruptcy, shipwreck, or the emigration of property.

D. Every act of exchange is advantageous only because through it a greater value is received than the one parted with was. (?) Fortunately, in normal trade, where both parties satisfy a real want, and neither party is deceived, this is actually the case on both sides. In accordance with all this, Baudrillart is of opinion that the whole theory of the balance of trade no longer exists.

SECTION III.

FURTHER REACTION AGAINST THE MERCANTILE SYSTEM.

Simultaneously with this opposition, the theory of the international balance of trade underwent important refinements, a new and improved edition, so to speak, of old Colbertism. Each school is wont to estimate the favorableness of the balance according to the preponderance of that which they consider the most important element in a nation's economy. Thus the population-enthusiasts, after the middle of the 18th century, distinguished the "balance of advantage" from the "merely numerical:" the former is favorable to the country which, by means of its exports, employs and feeds the greatest number of men; the latter to the country with a preponderating importation of money. And they call the former much more important than the latter. The great advance which this view constitutes over the old system lies chiefly in two points: that the number and employment of men are evidently, so far as the whole national economy and national life are concerned, a much more important element than the quantity of money in a country; and further, that now, at least, the possibility of a simultaneous profit on both sides is admitted. The best writer in this direction, Jos. Tucker, is among the great-grand-parents of the Manchester theory of to-day!

A further advance was made by men who introduced the higher notions of nationality and of the stages of civilization into the theory of international trade. Thus, at about the same time, the socialistic J. G. Fichte, with his shut-in commercial state, and the romantic reactionary, Ad. Müller, with his organic whole of national economy. Finally, Fr. List, with his "National system of Political Economy," and his severe subordination of the mere "agricultural state" to the "agricultural, manufacturing and commercial state," acknowledges the favorableness of the balance in the nation which by means of the exportation of manufactured articles, the importation of the means of subsistence and of articles to be manufactured, demonstrates and promotes its higher stage of civilization.

SECTION IV.

PARTIAL TRUTH OF THE MERCANTILE SYSTEM.

But even among the successors of Hume and Smith, a deeper insight into, so to speak, the physics of money and of international trade must have led to the recognition of many a truth which the mercantile system had, indeed, badly formulated, insufficiently proved, but which it had, nevertheless, an inkling of. And, indeed, how frequently it happens that the progress of science proceeds from one one-sidedness, through another opposed but higher one-sidedness, to the all-sidedness which knows no prejudice!

A. Precious-metal-money is, indeed, a commodity, but of all commodities, the most current, the most many-sided in its utility, the most economically energetic, and at the same time of peculiarly great durability. Money-capital, far from being the least useful portion of a nation's capital, is rather one of its most important parts; and especially in the higher stages of civilization, where the division of labor has been most largely developed, is it peculiarly productive and indispensable. Here it is really more likely that the possessor of commodities may be wanting the wished for money, than that the possessor of money should be wanting in the wished for commodities. And, hence, the numerous half mystic expressions of the magical power of money, which have passed into literature from the common usage of the people, can be, by no means, considered mere errors.

B. Just as little, can the impossibility of the preponderant importation of money for a long time, be asserted. Hume's rigid theory of a level, by no means, exactly corresponds with the reality. The precious metal which is, indeed, imported, but which does not subsequently enter into the circulation, need exert no influence whatever on the prices of commodities in general; and may, therefore, remain permanently in the country. Think only of the articles made of the precious metals, which minister to luxury, of buried private treasure, of the treasures of the state, which are idly stored up; as well as of a portion at least of most cash on hand. From the other side, also, the over-balance or under-balance (Ueber-oder Unterbilanz) of a country may continue, a very long time, when its internal trade with its money-need is, in the first case, an increasing, and in the last, a decreasing one. So far, the preponderance of the importation of money may be called a favorable sign and the preponderance of the exportation of money an unfavorable one. And the person who thinks that a permanent preponderance of exports or imports is not at all possible in the way of commerce, overlooks the possibility of a very extensive national indebtedness.

C. But a distinction should be made between the balance of payments and the balance of trade in the narrower sense of the expression. In the case of the latter, to be complete, it is necessary to carry to the credit side of the account: 1, The exports of commodities; 2, the profit made by parties at home by realizing on (Realisierung) the exports in foreign countries; 3, the freight-profit made by parties at home on exports and imports, as well as in foreign carrying trade (Zwischenverkehr); 4, the sale of inland ships in foreign countries; 5, premiums and compensation for damage on account of maritime insurance from foreign countries. On the debit side, on the other hand, the corresponding items when foreigners have received from the home country, as in the case of imports, etc. To obtain the general payment-balance, we have still, in addition, on the credit side: 1, The profit from home participation in enterprises in foreign countries and the transfers of capital originating therefrom; 2, the interest and repayments of money-capital loaned in foreign countries; 3, the sale of stocks (Effecten) to foreign countries as well as new loans to which the home country makes in foreign parts; 4, remittances from foreign countries to foreigners sojourning in the home country, and money brought with them by travelers and emigrants; 5, inheritances, pensions and extraordinary payments from foreign countries. Then, too, on the debit-side, belong the corresponding counter-items. If we, in this way, take a survey of the whole world, we shall perceive a treble current of the precious metals. The first and most regular goes, in long lines, from mining countries, over to the commercial countries of the world, and distributes the newly acquired gold and silver as commodities according to the wants of the coinage, of manufactures, etc. The second oscillates, as it were, in short waves from country to country, in order to adjust the plus or minus for the time being of payment-balances. Lastly, regular sudden currents, with slow subsequent counter-currents, when single economic districts require to make extraordinary drafts or shipments of the precious metals, by reason of bad harvests, war, a disturbed double standard, etc.

D. Since international indebtedness has so much increased, precisely the richest nations may have the greatest regular excess of exports over imports; partly because of the great amount of capital, etc., which they possess in foreign countries; partly because of the great development of their system of credit in the interior, by means of which they find substitutes for so great a part of the metallic currency.

SECTION V.

THE ADVANTAGES OF INTERNATIONAL TRADE.

The truth that no exportation is permanently possible without importation, and that, in international trade, also, both sides better their condition, was clear to the Italians in the fifteenth century, and in the sixteenth and seventeenth centuries to the Netherlanders.

Every nation can, through its instrumentality, for the first time, acquire not only those commodities which nature entirely refuses to it, but such also which it can itself produce only at a great cost. And here it is not so much the absolute costs of production as the comparative which are decisive. The country A may be superior to the country B in all kinds of productiveness; but when this superiority for the group of commodities x amounts to only 50 per cent., and for the group y, on the other hand, to 100 per cent., it is to the interest of A, which possesses only a limited quantity of the factors of production, to produce a surplus of the commodities y, and to exchange that surplus against what it wants of x. B, also, would willingly agree to this, even if it were not to get the commodities y entirely as cheap as A might supply them, but still decidedly cheaper than their production would cost in B itself. But, if both parties derive advantage from international trade, there is no necessity whatever that this advantage should be equally great on both sides. As in every struggle over prices, the gain here also is greatest on the side of the nation whose desire to hold fast to their own commodities is farthest from being outweighed by the want of the foreign commodity, and which, at the same time, employs most productively the equivalent received in imports in exchange for its exports. Yet, in estimating this productiveness, it is necessary to take the whole national life into consideration.

The international distribution of the precious metals is subject to the same law. These, also, are procured most cheaply by the nation which, directly or indirectly (by the production of counter values wished for by the whole world), employs the most productive economic activity upon them, and at the same time (it may be by especially well developed credit), is in the least urgent need of them. Therefore, on the whole, their value in exchange is wont to be lowest among the richest and most highly cultivated nations. Such a relative cheapness of gold and silver is not only a symptom of economic power, but considering the preëminent energy of these very commodities, at the same time, a means to procure most foreign commodities with a smaller expenditure of one's own forces. Hence, a great change in the distribution, hitherto usual, of the precious metals, produced, possibly, by great advances made in production here, or by an increase in consumption there, or by means of commercial prohibitions, etc., may be just as advantageous to the country which receives more as hurtful for the country which pays more; and both, all the more as the revolution in prices enhances the most productive elements of the nation there, and here the most unproductive. Hence, even when it cannot, in general, be said that one branch of commerce, carried on in a normal manner, should necessarily remain behind another in economic productiveness, those which have nothing to fear from a disturbance of their balance by the measures of foreign states are distinguished by the greatest security, and those are capable of the greatest growth which exchange articles to be manufactured (Fabrikanden), and the means of subsistence against ordinary manufactured articles.

SECTION VI.

INTERNATIONAL COMMERCIAL TREATIES.

All international commercial treaties have this object in common: to moderate the impediments to trade which arise from the differences and even from the enmities of states. According to time and character, they fall into three groups:

A. Medieval, where a barbarous state for the first time promises foreign merchants in general legal security, without which regular trade is unthinkable. Such treaties, where their provisions are not a matter of course, must be certainly considered as a salutary advance; and they may, under certain circumstances, be necessary even to-day.

B. Mercantilistic treaties, which close, perhaps, even a bloody commercial war carried on against a rival, or which by a closer connection with a state, whose rivalry is not so much feared, are intended to moderate the worst consequences of a general seclusion. Consistently carried out, and without any regard for consequences, the mercantile system really means a war of each state against all others, and it is no mere accident that after the cessation of the wars of religion (1648) and before the beginning of the war of the French revolution (1792), commercial wars occupy the foreground. Such economic alliances as are entered into in these treaties generally unite states which, by reason of the very different nature of their land and their different national culture, are adapted to production of very different kinds, and which, at the same time, have a common political interest. Each party here agrees with the other to give a preference to its subjects in trade, to not exceed certain maxima of duties, etc.

The art of the negotiator was employed to overreach the other contractant in relation to the balance of trade. It was considered a special matter of congratulation to induce a less highly developed nation to abandon the traditional means employed to artificially elevate its industries. Hence it is, that such friendly treaties frequently contained the germs of the bitterest enmity. A popular remnant of this second group has been noticeable even in recent times, when in diplomatic negotiations concerning the reciprocal modification of duties, it was considered an overreaching and even as an outrage, in case one state made more "concessions" than it received: evidently, a confusion of the producers of the industry in question with the whole nation.

C. Free-trade treaties, intended to pave the way to the general freedom of trade. Two provisions especially are characteristic here: putting the subjects of the other party on an equal footing with those of the home country in what relates to the ship-duties, etc.; and the promise that the products of the other party, as regards import duties, shall be treated like those of the most favored nation. Whether this preparation for the universal freedom of trade is better made through the medium of an international treaty or of national legislation cannot be answered generally. Besides, in our day, the preference of one foreign nation would be easily evaded through the perfection of the modern means of communication.