TRADE BALANCE AND NATIONAL BALANCE The phrase "balance of trade," then, appears to be an applica tion of a trader's language in his own business to the larger af fairs of nations or rather of the aggregate of individuals in a na tion engaged in foreign trade. A trader in his own books sets his sales against his purchases, and the amount by which the former exceed the latter is his trade balance or profit. What is true of the individual, it is assumed, must be true of a nation or of the aggregate of individual traders in a nation engaged in the foreign trade. If their collective sales amount to more than their collective purchases the trade balance will be in their favour, and they will have money to receive. Contrariwise, if their purchases amount to more than their sales, they will have to pay money, and they will presumably be living on their capital. The argument fails, however, in many ways. Even as regards the experience of the individual trader, it is to be observed that he may or may not receive his profit, if any, in money. As a rule he does not do so. As the profit accrues he may invest it either by employing labour to add to his machinery or warehouses, or by increasing his stock in-trade, or by adding to his book debts, or by a purchase of stocks or shares outside his regular business. At the end of a given period he may or may not have an increased cash balance to show as the result of his profitable trading. Even if he has an increased cash balance, according to the modern system of business, this might be a balance at his bankers', and they in turn may have invested the amount so that there is no stock of the precious metals, or "hard money," anywhere to represent it. And the argument fails still further when applied to the transactions between nations, or rather, to use the phrase already employed, between the aggre gate of individuals in nations engaged in the foreign trade. It is quite clear that if a nation, or the individuals of a nation, do make profit in their foreign trading, the amount may be invested as it accrues—in machinery, in warehouses, in stock-in-trade, in book debts or in stocks and shares purchased abroad, so that there may be no corresponding "balance of trade" to bring home. There is no doubt also that what may be is in reality what largely happens.
In another particular the argument also fails. In the aggregate of individual trading with various countries, there may sometimes be purchases and sales as far as the individuals are concerned, but not purchases and sales as between the nations. For example, goods are exported from the United Kingdom, ammunition and stores and ships, which appear in the British returns as exports, and which have really been sold by individual British traders to individuals abroad; but these sales are not set off by any pur chases on the other side which come into the international account, as the set-off is a loan by the people of one country to the people or government of another. The same with the export of railway and other material when goods are exported for the purpose of constructing railways or other works abroad. The sales are made by individuals in the United Kingdom to individuals abroad; but there is no set-off of purchases on the other side. Mutatis mutandis the same explanation applies to the remittance of goods by one country to another, or by individuals in one country to individuals in another to pay the interest or repay the capital of loans which have been received in former times. These are all cases of the movement of goods irrespective of international sales and pur chases, though the movements themselves appear in the inter national records of imports and exports, and therefore it seems to be assumed, though without any warrant, in the international records of the balance of trade. There is yet another failure in the comparison. The individual trader would include in his sales and purchases services such as repairs performed by him for others, and similar services which others do for himself ; but no similar accounts are kept of the corresponding portions of international trade such as the earning of freights and commissions, although in strictness, it is obvious, they belong as much to international trade as the imports and exports themselves, which cannot there fore show a complete "balance of trade." The illusions which may result then from the confusion of ideas between a balance of trade or profit, and a balance of cash paid or received, and from the identification of an excess of imports over exports or of exports over imports with the balance of trade itself, though they are not the same thing, hardly need description. The believers in such illusions are not entitled to any hearing as economists, however much they may be accepted in the market place or among politicians.
The "balance of trade" and "the excess of imports over ex ports" are thus simply pitfalls for the amateur and the unwary On the statistical side, moreover, there is a good deal more to be urged in order to impress the student with care and attention. The records of imports and exports themselves may vary from the actual facts of international purchases and sales. The actual values of the goods imported and paid for by the nation may vary from the published returns of imports, which are, by the necessity of the case, only estimated values. And so with the exports. The actual purchases and sales may be something very different. A so-called sale may prove abortive through its not being paid for at all, the debtor failing altogether. In any case the pur chases of a year may not be paid for by the sales of the year, and the "squaring" of the account may take a long time. Still more the estimates of value may be so taken as not to give even an approximately correct account as far as the records go.
The number of factors to be introduced into a "balance of trade" to make a complete account or "balance of payments" is considerable. Formerly, after accounting for all items of visible and invisible exports and imports, the net balance of the account was left to be regarded as settled by the import or export of gold, after allowing for any short term borrowing or "lag" in settlement of accounts. But the practice has now grown up of including all monetary items and attempting an exact balance, without any statistical residuum. This leads to an effort toward a new degree of precision.
For a long time international comparisons have been vitiated by differences in presentation and collection of statistics. A special sub-committee of the International Chamber of Commerce in April, 1927, drew up a uniform model to clear up the confusion, using as their basis the classification adopted by the economic and financial section of the League of Nations in their attempts to collect and publish balance of trade and balance of payment sta tistics from the various governments. This model in detail is as follows I. Merchandise I. (a) Merchandise, including silver bullion, exported (as per trade returns, including fish sold in foreign ports and analogous sales of commodities not already included in statistics of exports) .
(b) Sale of ships.
(c) Parcels post.
2. Adjustment for under or over-valuation of (I) : (a) To arrive at f.o.b. value.
(b) To convert "official" values which may relate to a prior date, to current "market" values.
(c) To correct bias in traders' declarations, e.g., where there is a tariff.
(d) To include exports (or imports) of commodities under Government auspices (e.g., reparation deliveries in kind) which do not appear in the regular trade returns.
(e) To adjust the statistics to agree with the political territory (e.g., mother-country, excluding colonies) .
3. Contraband.
H. Bullion, Specie and Currency Notes 4. Gold bullion and gold specie exported (as per trade returns) .
5. Specie (other than gold) exported (as per trade returns) .
6. Currency notes not elsewhere indicated, exported.
7. Adjustment for under or over-valuation of (4) and (5) in order to arrive at the commercial value f .o.b.
III. Business Services to Foreign CountriesIii. Business Services to Foreign Countries A. Transport Services: 8. Shipping freights, charter money, passage money and similar earnings, received by national ships on account of all foreign trade.
9. Port receipts from foreign shipping in national ports.
Jo. Transport and other charges received for foreign goods transshipped or in transit (if not included in Group I., Nos. I to 3) .
II. Post and telegraph and telephone earnings, not elsewhere indicated.
B. Trading Profits and Brokers' and Merchanting Commissions: 12. On exports and re-exports not included in f .o.b. price. 53. On commodities not entering into the country's imports or exports.
C. Banking and Financial Services: 14. Acceptance commissions.
A study of the above shows more clearly than any lengthy de scription the nature of the problem. The movements of gold are fairly well known, and the residual or balancing figure now tends to be the foreign investment items.
In spite of the practical differences which such estimates involve, the study of this question has received a remarkable amount of attention since the World War. Official estimates for the year 1923 or 1924 have been prepared by 15 governments, the most elaborate being those of the United States of America. For this country very detailed statements, official or non-official, have been compiled since 1919. These are summarized in the first table on p• The statement renders clear the manner in which the enormous net exports of the earlier years, largely to Europe, were covered by long-term loans and short-term credits, how the floating credits are being gradually liquidated, and how the export surplus itself sank from over $4,000,000,000 in 1919 to $389,000,00o in 1923. The increase of this surplus in 1924 was coincident with the revival of capital export to Germany in particular.
In 1926 very considerable revisions were made in the more recent estimates of the British balance of payments. The united figures for 1924 and 1925 and the preliminary estimate for 1926 appear in the second table on p. 956.
mittances of interest and of capital repaid. (4) When capital is repaid the country receiving it need not be living on it, but may be investing it at home. (S) The foreign trading of countries may also comprise many transactions, such as the earning of freights and commissions, which ought to appear in a proper account showing a balance of trade, as similar transactions appear in an individual trader's account, but which are not treated as imports or exports in the statistical returns of a nation's foreign trade.
(6) Import and export returns themselves are not the same as ac counts of purchases and sales; the values are only estimates, and must not be relied on literally without study of the actual facts.
(7) The excess of imports or exports may vary indefinitely at dif ferent times according as a creditor country is receiving or lend ing at the time, or according as a debtor country is borrowing or paying off its debts at the time, but the permanent characteristics are always to be considered. (8) Governmental obligations for in ternational loans (interest and repayment of capital) and repara tions, are now an important addition to the account.
(R. Gi. ; J. S.)