1911 Encyclopædia Britannica/Balance of Trade

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BALANCE OF TRADE, a term in economics belonging originally to the period when the “mercantile theory” prevailed, but still in use, though not quite perhaps in the same way as at its origin. The “balance of trade” was then identified with the sum of the precious metals which a country received in the course of its trading with other countries or with particular countries. There was no doubt an idea that somehow or other the amount of the precious metals received represented profit on the trading, and each country desired as much profit as possible. Princes and sovereigns, however, with political aims in view, were not close students of mercantile profits, and would probably have urged the acquisition of the precious metals as an object of trade even if they had realized that the country as a whole was exporting “money's worth” in order to buy the precious metals which were desired for political objects. The “mercantile theory” was exploded by Adam Smith's demonstration that gold and silver were only commodities like others with no special virtue in them, and that they would come into a country when there was a demand for them, according to the amount, in proportion to other demands, which the country could afford to pay; but the ideas in which the theory itself has originated have not died out, and the idea especially of a “balance of trade” to which the rulers of a country should give attention is to be found in popular discussions of business topics and in politics, the general notion being that a nation is prosperous when its statistics show a “trade balance” in its favour and unprosperous when the reverse is shown. In modern times the excess of imports over exports or of exports over imports, shown in the statistics of foreign trade, has also come to be identified in popular speech with the “balance of trade,” and many minds are no doubt imbued with the ideas (1) that an excess of imports over exports is bad, and (2) an excess of exports over imports is the reverse, because the former indicates an “unfavourable” and the latter a “favourable” trade balance. In the former case it is urged that a nation so circumstanced is living on its capital. Exact remedies are not suggested, although the idea of preventing or hampering foreign imports as a means of developing home trade and of thus altering the supposed disastrous trade balance is obviously the logical inference from the arguments. A consideration of these ideas and of recent discussions about imports and exports, appears accordingly to be needed, although the “mercantile theory” is itself exploded.

The phrase “balance of trade,” then, appears to be an application of a trader's language in his own business to the larger affairs of nations or rather of the aggregate of individuals in a nation 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, of “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 aggregate 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, or warehouses, or stock-in-trade, or book debts, or 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. A prosperous foreign trade carried on by any country implies a continuous investment by that country either abroad or at home, and there may or may not be a balance receivable in actual gold and silver. 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 purchases 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 purchases, though the movements themselves appear in the international 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 therefore 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 things, 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 exports” 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 purchases 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. Thus in the plan followed in the United Kingdom imports are valued as at the port where they arrive and exports at the port where they are despatched from—a plan which so far places them on an equal footing for the purpose of striking a balance of trade. But in the import and export records of the United States a different plan is followed. The imports are no longer valued as at the port of arrival with the freight and other charges included, but as at the port of shipment. The results on the balance of trade drawn out must accordingly be quite different in the two cases. With other countries similar differences arise. To deduce then from records of imports and exports any conclusions as to the excess of imports or exports at different times is a work of enormous statistical difficulty. Excellent illustrations will be found in J. Holt Schooling's British Trade Book (1908).

The country which presents the most interesting questions in connexion with the study is the United Kingdom, with its largely preponderating foreign trade. Its annual imports and exports, excluding bullion, exceed 800 millions sterling, and the bullion one year with another is 100 millions more. Its excess of imports, moreover, between the middle and end of the 19th century gradually rose from a small figure to 180 millions sterling annually, and occasioned the popular discussion referred to respecting an “adverse” balance of trade, and particularly the belief existing in many quarters that the nation is living on its capital. The result has been a new investigation of the subject, so as to bring out and present the credits to which the country is entitled in its trade as a shipowner and commission merchant, and to exhibit at the same time the magnitude of British foreign investments, which cannot be less than 2000 millions sterling and must bring in an enormous annual income. Other countries such as France, Germany, Belgium, Holland, Denmark, Norway and Sweden, are in the same condition, though their foreign trade is not on the same scale, and similar rules apply to the reading of their import and export accounts. The United States is a conspicuous instance of a country which in the first decade of the 20th century was still in the position of a borrower and had a large excess of exports, though there were signs of a change in the opposite direction. New countries generally, such as Canada, Australia and the South American countries, resemble the United States. Comparisons are made difficult by the want of uniformity in the methods of stating the figures, but that different countries have to be grouped according as they are indebted or creditor countries is undeniable, and no study of the trade statistics is possible without recognition of the underlying economic circumstances.

In conclusion it may be useful to repeat the main propositions laid down as to the balance of trade, (1) A “balance of trade” to the individual trader, from whose experience the phrase comes, is not necessarily, as is supposed, a balance received or receivable in the precious metals. It may be invested as it accrues—in machinery, or warehouses, or stock-in-trade, or in book debts, or in stocks and shares or other property outside the trader's business, as well as in cash. (2) What is true of the individual trader is also true of the aggregate of individuals engaged in the foreign trade of a country. Cash is only one of the forms in which they may elect to be paid. (3) The imports and exports recorded in the statistical returns of a country do not correspond with the purchases and sales of individual traders, as the sales especially may be set off by loans, while the so-called imports may include remittances 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. (5) 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 accounts of purchases and sales; the values are only estimates, and must not be relied on literally without study of the actual facts. (7) Import and export returns in different countries are not in all cases taken at the same point, there being important variations, for instance, in this respect between the returns of two great countries, the United Kingdom and the United States, which are often compared, but are really most difficult to compare. (8) The United Kingdom is a conspicuous instance of a country which has a great excess of imports over exports in consequence of its large lending abroad in former times; while its accounts are specially affected by the magnitude of its services as a trading nation carrying passengers and goods all over the world, which do not result, however, in so-called “exports.” The United States, on the other hand, is a conspicuous instance of an indebted nation, which has or had until lately few or no sums to its credit in foreign trade except the visible exports. (9) The various countries of the world naturally fall into groups. The nations of western Europe, such as France, Germany, Belgium, Holland, Sweden and Norway, fall into a group with Great Britain as creditor nations, while Canada, Australasia and the South American countries fall into a group with the United States as undeveloped and indebted countries, So also of other countries, each belongs naturally to one group or another. (10) The excess of imports or exports may vary indefinitely at different times according as a creditor country is receiving or lending 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. (R. Gn.)