International Trade I 1

INTERNATIONAL TRADE I 1. Benefits of international trade. § 2. Erroneous views of benefits. § 3. Relatively advantageous industries. § 4. Persistence of differences between nations. § 5. Doctrine of comparative advantages. § 6. Ad vantages confused with monetary costs. § 7. Equation or international exchange. § 8. Balance of merchandise movements. § 9. Cancelation of foreign indebtedness. 6 10. Par of exchange. § 11. International monetary balance and price levels.

§ 1. Benefits of international trade. International trade is carried on by individual traders in any two countries. What motive impels men to trade across the political bound aries of a state? The simple answer is that each trader has something to give and desires to get something in return. Each is seeking to get something that has to him a greater value than the thing he gives, and he believes he can do this in trade with a foreigner better than by trading at home. In any trade, both parties gain, or think they are 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 depen dent upon continued benefits. The once generally accepted maxim that the gain of one in trade is the loss of another is now generally rejected, but often still it is assumed to be true of international trade. The starting-point for the con sideration 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.

I See Vol. I, ch. 5, I 1 and § 7.

230 The advantages of international trade are indeed but those of division of labor in general, in the particular case where it happens to cross political boundaries. The great ter ritorial divisions of industry are determined first and mainly by natural differences of climate, soil, and material resources. Thus trade arises easily between North and South, between warm and frigid climates, between new countries and old, between regions sparsely and regions densely populated? Territorial divisions of industry are determined, secondly, by social and economic differences such as those with re spect to accumulation of wealth, amount of lendable capital, invention, organization and intelligence of the workers, and the grade of civilization.

§ 2. Erroneous views of benefits.

Certain erroneous ex planations of the advantages of foreign trade may be dis missed with brief mention. It is said to give vent for sur plus production and to give a wider market to what would otherwise go to waste. This involves the same fallacy as the "lump of labor notion," the destruction of machinery, and the praise of waste and luxury' If it were true that sale to backward nations were now necessary to give an outlet for products that would otherwise rot in the warehouses, a time would come at length when the world would have an enormous surplus unless neighboring planets could be suc cessively annexed. Again it is said that the great purpose

of foreign trade is to keep exports in excess of imports, so that the money of the country may constantly increase in amount. The ideal of such theorists is an impossible condi tion where the country would constantly sell and never buy.* In the narrow commercial view of the subject the sole object of foreign trade is to afford a profit to the merchants, regard less of the welfare of the mass of the citizens.

§ 3. Relatively advantageous industries. Foreign trade 2 See Vol. I, ch. 6, I 11, on the origin of markets.

3 See Vol. 1, chs. 36 and 37.

4 Recall ch. 3, in general, on the nature of monetary demand.

normally imparts increased efficiency to the productive forces of each country. In most cases it is apparent that labor is more effective and gets a larger product when it is ap plied in those ways for which the country is best fitted and for which it offers the best and most bountiful materials. When two countries are somewhat differently situated, such as an old country like England and a newer country like the United States in the nineteenth century, the relative ad vantages of various industries in the two countries are very unlike. The newer country excels in its broad area, its abundant rich lands, its bountiful natural resources of forests and mines. These are the superior opportunities that give the economic motives for settlement and for continued im migration from other lands. Most of the newcomers find it to their advantage to develop the peculiar opportunities of the new land, rather than to go on producing the same things in the same way as they did in the old Thus they get a larger quantity of products per day's labor, and are able to gain by trading a part of these for the products of the older country. Thus the characteristic industries of the two countries must differ. Further, when special branches of industry have developed at one place, they make possible the advantages of large production and of high specialization. Without any government supervision, there fore, but simply through the choice of enterprises, each citizen seeking the best occupation and best investment of capital for himself, industries are developed in which each country is either most markedly superior, or least inferior to its neighbors. If either laborers or capitalists in the new coun try were to turn to the less-favored industries they would be forced to accept a smaller reward than they can earn in the more favored.