1. The direct advantages of foreign trade consist in the increased efficiency it imparts to productive forces. In explanation of the advantages of foreign trade it is said to be a vent for surplus production and to give a wider market to what would otherwise go to waste. This involves the same fallacy as the "lump of labor," the destruction of machinery, and the praise of luxury. If backward nations now give a vent for products which would otherwise rot in the warehouses, at length a time will come when the world will have an enormous surplus unless neighboring planets can be successively annexed. Again it is said that the great purpose of foreign trade is to keep exports in excess of imports so that money may constantly increase in amount. The ideal of such theorists is an impossible condition where the country would constantly sell and never buy. In the commercial view the sole object of foreign trade is to afford a profit to the merchants, regardless of the welfare of the mass of the citizens.

Fallacious explanations of the gains from foreign trade.

The main advantage of foreign trade is the same as that of any other exchange. It is hardly necessary to review the explanation here: the increased efficiency of labor when it is applied in the way for which each country is best fitted; the liberation of productive forces for the best uses; the development of special branches of industry with increasing returns; the larger scale production with resulting greater use of machinery and with increased chance of invention; the destruction of local monopolies.

The moral and intellectual gains of foreign commerce were formerly much emphasized. Commerce is an agent of progress; it stimulates the arts and sciences; it creates bonds of common interest; it gives an understanding of foreign peoples and an appreciation of their merits; it raises a commercial and moral barrier to war; and it furthers the ideal of a world federation, the brotherhood of man.

The real advantages of foreign trade.

2. Free foreign trade thus has in its favor the presumption of advantage to the citizens; but various interests may be adversely affected. The general attitude of economic students for a century and a half has been favorable to a large measure of freedom in foreign trade. But the actual practice of nations is opposed to the principles laid down by the philosophers and accepted by nearly all serious students of the question. Germany adopted very restrictive measures under Bismarck in 1879 and by a recent law has discouraged trade still further. France, Italy, and other smaller nations of Europe have strong protective tariffs. The United States has followed a restrictive policy for the last century almost unvaryingly. The explanation of this contradiction is not entirely simple. Free trade is not the most desirable thing for every one. Great interests are affected by foreign trade and certain of these interests are able to dominate legislation. The general proposition of free trade between nations, as advocated by most economists since Adam Smith, is rejected by a majority of the people, by the politicians, and by the legislators.

Conflict between general and special interests.

Prevalence of protective tariffs.

Questions On Chapter 50. The General Theory Of International Trade

1. Is it bad policy to let the people of Palo Alto spend money in San Francisco for things that could be produced at home?

2. Pensions are defended as putting money in circulation. Is this like any tariff arguments you have heard?

3. Is it bad policy for California to buy New England manufactures?

4. If there were no legal bar to a tariff between the states, would a tariff probably be imposed? If so, would it be a wise measure?

5. A nation with n dollars in circulation has to pay a war indemnity of n dollars to another country having the same circulation, how much money will each then have, and what will be the effect on prices, foreign trade, rate of exchange? (From Davenport.)

6. If large shipments of wheat are made to England, will bills of exchange on London be higher or lower in New York?

7. What effect on exchange has the holding of American bonds abroad?