The Wealth of Nations

Book 4, Chapter 3

The Extraordinary Restraints of Importing Goods from Countries with an Unfavorable Balance

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Chapter 3 Summary

Part I

The Unreasonableness of those Restraints, even upon the Principles of the Commercial System

The second method employed by the trading system to keep gold and silver in a country was by placing restraints on the importation of goods from countries with which the balance of trade is disadvantageous. These included lighter tariffs, rarely exceeding 5%, for certain nations, while France’s goods were taxed 75%—equivalent to a prohibition. As a result, France imposed heavy taxes on our goods, resulting in a breakdown in trading relations between the two countries, with smugglers now the principal importers of French goods into Britain.

This situation arose out of national prejudice and animosity and is unreasonable in a commercial system. Even though free trade between France and Britain would mean the balance of trade would be in France’s favor, it would not be disadvantageous to Britain. If France’s wines are better and cheaper than those of Portugal, it would be advantageous for Britain to purchase wine from France rather than Portugal. Though the value of individual goods imported from France would be increased, the overall total value would be decreased, since French goods of the same quality were cheaper than those of another country. This would be the case even if the imported French goods were entirely for home consumption in Britain, but part of them might be re-exported to other countries and sold at a profit, perhaps covering the initial cost of the imported goods. This was the case with the East India trade: though goods were bought with gold, a portion of them were re-exported to other countries for more gold than the initial cost.

Part II

The Unreasonableness of those Extraordinary Restraints upon other Principles

The notion of imposing restraints and other trade regulations to regulate balance of trade is absurd. The notion that when two countries trade and the balance of trade is even neither loses nor gains, but that if balance is in favor of one or the other country, then one will lose and the other gain is false.

Trade under free market conditions, without the imposition of taxes or the constraints of monopolies, is always advantageous, though not necessarily in equal proportion to each country, in terms of the exchangeable value of the annual produce of the land and labor of the country. If there is an equal balance in the home produce traded, each will gain equally and will replace the capital employed in producing this surplus produce.

In a situation where one country is exporting home-produced commodities and another foreign goods, the balance would still be even, with each country exchanging commodities for commodities. Both countries gain, but not equally since the inhabitants of the country importing the home-produced commodities would make a higher profit from this trade. If Britain, for example, imported from France nothing but French-produced commodities, which it paid for with foreign goods such as tobacco rather than home-produced goods, France would made more profit from this transaction than Britain.

Trade between two countries never consists entirely of the exchange of native commodities on both sides, nor of native commodities on one side and foreign goods on the other. Almost all countries exchange partly native and partly foreign goods, with the country trading the most home-produced and least foreign goods always making the most profit.

If, on the other hand, Britain paid for these French imports with gold rather than tobacco, the balance of trade would be uneven since the commodities are being paid for with gold rather than exchanged for other commodities. Once again, both countries would benefit but France more so than Britain. The profit made by Britain would be employed in producing further goods with which to purchase gold, thus replacing that employed. Britain’s capital would be no less as a result of this exportation of gold and silver than it would with the exportation of an equal value of any other commodity; on the contrary, its capital would generally be increased.

Tariffs imposed by Britain on the wine trade appear to favor Portugal over France. The reason for this is it is generally believed that market demand for Britain’s produce is greater in Portugal than it is in France. Preferential trade agreements were established between Britain and Portugal. A successful trader will buy his produce where it is cheap and good quality. These monopolies and trade agreements have led to suspicion and prejudice between trading nations, with each considering its neighbor a competitor—when in fact it is in every man’s interest to buy whatever he wants from whomever sells it cheapest.

Just as it is in the interests of freemen to hinder the rest of the inhabitants from employing any workmen but themselves, it is in the interest of a country’s merchants and manufacturers to secure the monopoly of the home market—leading to heavy duties being placed by Great Britain and most other European countries on almost all imported goods, with high duties and prohibitions on foreign competitors, and restraints upon imported goods from countries with which trade was thought to be disadvantageous.

Trade between France and Britain has been subjected to many prohibitions and restraints. If these two countries were to focus on their own interests, without mercantile jealousy or national animosity, France’s commerce might be more advantageous to Britain than that of any other country—and vice versa. France is Britain’s nearest neighbor. Even between the parts of France and Britain most remote from each other, returns would be made at least once in the year—at least three times greater than that for trade with the North American colonies, which experience returns only every three to five years. Furthermore, France’s population stands at twenty-four million, compared to three million in the North American colonies, and France is a far wealthier country than North America, despite its large numbers of poor and beggars, which is due to the unequal distribution of riches.

Despite the popular notion that an unfavorable balance of trade will result in a country’s ruin, this is not the case, as no European country has been negatively affected. On the contrary, balance of trade between two countries is always advantageous.

There is another balance, very different to the balance of trade, which does indeed affect a nation’s prosperity or demise: the balance between production and consumption. If the exchangeable value of production exceeds that of consumption, a society’s capital will increase proportionately; in this case, the society is living within its revenue. If annual produce falls short of annual consumption, a society’s capital will diminish each year.

This balance of production and consumption is entirely different from the balance of trade. It may be constantly in favor of a nation, even if the balance of trade is against it. A nation may have been importing to a greater value than it exports for the past fifty years, yet its real wealth, the exchangeable value of the annual produce of its lands and labor, may have been increasing in a much greater proportion.

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