The Wealth of Nations
Book 4, Chapter 6
Treaties of Commerce
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Chapter 6 Summary
When a nation enters into preferential trade agreements with other countries, either permitting the entry of certain goods from just one foreign country, or exempting the goods of just one country from duties, the merchants and manufacturers involved are at a significant advantage over others, enjoying a form of monopoly in the country favoring them.
Although these preferential trade agreements favor these merchants and manufacturers, they disfavor the countries receiving the goods of these individuals. By granting a monopoly to a foreign nation, a country’s citizens are forced to pay more for foreign goods than they would in the case of free competition. The purchasing power of the nation’s annual produce in terms of buying foreign goods consequently diminishes, since there is an imbalance between the nominal and natural prices of the foreign goods. A country therefore loses purchasing power as a result of these preferential trade agreements.
A country sometimes grants a monopoly to a foreign nation for specific goods in the belief that, in the overall commerce between the countries involved, it will in fact sell more than it would buy, therefore procuring a greater amount of gold and silver than it would have otherwise. It was on this basis that the trade agreement between Britain and Portugal was established, with Portugal agreeing to admit Britain’s woolen goods, and Britain Portugal’s wine, with no customs duty.
Annually, Portugal receives a greater quantity of gold from Brazil than can be employed in its domestic commerce. The surplus must be exchanged for something for which there is a more advantageous market at home. A large share of it comes annually to Britain, in return for English commodities.
The annual importation of gold and silver is employed in foreign trade, which can be carried out more advantageously by means of these metals than of other goods since it costs less to transport them from one place to another, and they do not lose value during transportation, unlike certain commodities. Of all the commodities bought in one foreign country with the sole intent of being sold or exchanged for goods in another country, gold and silver is the most convenient.
When a commodity is taxed, although the merchant involved advances the money, he does not truly pay the tax as he recovers it in the price of the commodity. At the end of the day, the tax is paid by the end consumer. But money is a commodity, of which every man is a merchant; nobody buys it with a view solely to selling it again, and it has no end consumer.
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