Adam Smith's Simplified Wealth of Nations, Book 4, Chapter 6a: Commercial Treaties
Chapter 6a: Commercial Treaties
1The commerce of foreign merchants and manufacturers becomes so favoured when a nation:
enters a treaty that permits the entry of certain goods from that foreign country, while banning those from other countries
exempts the goods of that foreign country from duties, while subjecting those of other countries.
Those foreign merchants and manufacturers derive great advantage from the treaty.
They enjoy a monopoly in the country so indulgent to them.
That country becomes a more:
extensive market for their goods, and
Other foreign goods are excluded or subjected to heavier duties.
advantageous market for their goods.
They can sell their goods at a higher price than with foreign competitors.
2 However, such treaties are disadvantageous to the merchants and manufacturers of the favouring country.
A monopoly is granted to a foreign nation against local manufacturers and merchants.
The country must buy foreign goods dearer than in a free competition.
Its own produce must be sold cheaper to buy foreign goods.
When two things are exchanged, the cheapness of one is a consequence of the dearness of the other.
The exchangeable value of its national annual produce is likely to be reduced by such a treaty.
This reduction can rarely be a positive loss.
It will only lessen the gain the country might otherwise make.
Though the country sells its goods cheaper, it will probably not sell them for less than what they cost.
The trade could not go on long if it did.
The favouring country may still gain by the trade.
But it will be less than if there were a free competition.
3 Some commercial treaties were supposed advantageous on different principles.
A commercial country sometimes granted this monopoly against itself for certain goods from a foreign nation because it expected that:
it would sell more than it would buy, and
the balance in gold and silver would be returned to it.
This is the basis of the commercial treaty between England and Portugal.
It was concluded in 1703 by Mr. Methuen.
It was so much commended.
Below is a literal translation of that treaty consisting of three articles.
4 Article 1. His royal majesty of Portugal promises to forever admit British woollen cloths and woollen manufactures as before they were banned. 5 Article 2. Her royal majesty of Great Britain shall admit Portuguese wines into Britain.
The duty for Portuguese wines will be deducted by 1/3 of the duty for the like quantity of French wine whether:
there shall be peace or war between Britain and France
the name of custom or duty or whatever title is used
directly or indirectly
the wines imported into Great Britain were in hogsheads or other casks
But if this deduction of duty shall be attempted and prejudiced, it shall be lawful for Portugal, to again ban British woollen cloths and woollen manufactures.
6 Article 3. The lords promise:
that their above-named masters shall ratify this treaty, and
that exchanges will be done within two months
7 By this treaty, Portugal becomes bound to admit English woollens as before the ban.
Portugal will not raise the duties paid before the ban.
But Portugal is not bound to admit them on any better terms than those of other nations such as France or Holland.
Great Britain, on the contrary, becomes bound to admit Portuguese wines paying only 2/3 of the duty paid for French wines.
French wines are likely to compete with Portuguese wines.
This treaty is advantageous to Portugal and disadvantageous to Great Britain.
8 It was celebrated as a masterpiece of English commercial policy.
Portugal receives more gold annually from Brazil than can be employed in its domestic commerce.
The surplus is too valuable to be allowed to lie idle and locked up in coffers.
It must be sent abroad and exchanged for something for which there is a more advantageous market at home.
Much of it comes to England in return for:
English goods, or
European goods traded through England
Mr. Baretti was informed that the weekly packet-boat from Lisbon brings more than £50,000 in gold to England weekly.
This sum was probably exaggerated.
It would amount to more than £2,600,000 a year, which is more than what Brazil can afford. [50,000 * 52]
9 Some years ago, our merchants were out of humour with the crown of Portugal.
Some of their privileges were granted by the grace of that crown.
Our merchants probably solicited some privileges in return for the defence and protection from the crown of Great Britain.
Those privileges were infringed or revoked.
Our merchants then represented the Portugal trade as less advantageous than before.
They pretended that most of the Portugal trade and the importation of Portuguese gold was because of other European nations.
They proved this by saying that the value of Portuguese exports to Great Britain nearly matched the value of British exports to Portugal.
10 Let us suppose that the total trade between Great Britain and Portugal:
was on account of Great Britain
amounted to a greater sum than what Mr. Baretti imagined
This trade would not be more advantageous than other trades which gave us an equal value of goods in return. 11 Only a very small part of this precious metals importation is added to Great Britain's plate or coin.
The rest must be sent abroad and exchanged for consumable goods.
But if those foreign consumable goods were bought directly with English goods, it would be more advantageous for England to:
Buy Portugal's gold with English goods.
Buy those foreign consumable goods with that gold.
"A direct foreign trade of consumption is always more advantageous than a round-about one"
A direct foreign trade requires a much smaller capital than a roundabout trade.
It would be more advantageous for England to employ:
less English industry to produce goods for Portugal
more English industry to produce goods for other nations, which then produce goods demanded in England
In this way, procuring the gold and consumable goods would employ less capital than at present.
There would be spare capital to be employed for other purposes which would then excite industry and raise its annual produce.
12 Even if Britain were entirely excluded from the Portugal trade, it would have very little difficulty in procuring the gold it needs.
Gold, like every other commodity, is always bought by those who can buy it.
Surplus Portuguese gold would be sent to a foreign nation which would be glad to sell it to Great Britain, in the same way Great Britain sells foreign goods.
When we buy gold from Portugal, we buy it first hand.
When we buy it from any other nation, except Spain, we buy it second hand.
We might pay dearer.
This difference would surely be too insignificant to deserve the public attention.
13 Almost all our gold comes from Portugal.
Our balance of trade with other nations is said to be against us or not much in our favour.
But we should remember that the more gold we import from one country, the less we must import from all others.
"The effectual demand for gold, like that for every other commodity, is in every country limited to a certain quantity."
If 9/10 of this quantity is imported from one country, only 1/10 remains to be imported from others.
The more gold imported, in excess of what is needed, the more must be exported.
The balance of trade is the most insignificant object of modern policy.
The more the balance of trade is in our favour with some countries, the more it must be against us with many others.
14 England could not subsist without the Portugal trade based on this silly notion.
Towards the end of the late war, France and Spain required the King of Portugal to exclude all British ships from his ports.
He received French or Spanish garrisons in his ports for this purpose.
The king of Portugal's brother-in-law is the king of Spain.
If he had submitted to the ignominious terms proposed by his brother-in-law, Britain would have been freed from a greater inconveniency than the loss of the Portugal trade.
Britain would be burdened with supporting Portugal, a very weak ally.
Portugal was so defenceless.
England's whole power would not be able to defend it in a future campaign.
The loss of the Portugal trade would have created a considerable embarrassment to the merchants engaged in it.
They might not have found any other advantageous employment for their capitals after a year or two.
This would probably be all the inconvenience England could have suffered from this commercial policy.
15 The great annual importation of gold and silver is for foreign trade and not for plate nor coin.
A round-about foreign trade of consumption can be carried on more advantageously by gold and silver than any other goods.
Gold and silver are the universal instruments of commerce.
They are more readily received than any other goods because:
they have small bulk and great value
it costs less to transport them than almost any other merchandise
they lose less of their value by being so transported
there is no other commodity so convenient for foreign trade as gold and silver
The principal advantage of the Portugal trade is in facilitating the round-about foreign trades of consumption done in Great Britain.
It is not its capital advantage, though it is a considerable one.
16 Any addition to kingdom's plate or coin only requires a very small annual importation of gold and silver.
Even if we had no direct trade with Portugal, this small amount could always be very easily got.