Chapter One: Foreign Trade

Chapter One

On Foreign Trade

Abstract: Here the circular-flow economy is extended to international trade. Instead of barter or exchange with money, Cantillon explains how international trade takes place on the basis of bills of exchange. He shows that a state which accumulates money will enjoy a temporary gain in international trade, but that states where manufacturing industries develop will enjoy a higher standard of living. The only clear exception Cantillon makes to free trade is his famous endorsement of the English Navigation Acts, where domestic shipping is protected, not in its own right, but to provide ships and sailors during wartime.

WHEN A STATE EXCHANGES a small product of land for a larger in foreign trade, it seems to have the advantage; and if money is more abundant than abroad, it will always exchange a smaller product of land for a greater one.

When the state exchanges its labor for foreign products, it seems to have the advantage, because its inhabitants are fed at the foreigner’s expense.

When a state exchanges products and labor for a larger amount of foreign products, that require an equal or greater amount of labor, it seems again to have the advantage.

If the ladies of Paris annually consume lace from Brussels valued at 100,000 ounces of silver, it will require a quarter of an acre of land in Brabant to grow the 150 pounds of flax necessary to make the fine lace in Brussels. It will require the labor of approximately 2,000 people in Brabant during the year for the several tasks involved, from the sowing of the flax to the final perfection of the lace. The lace merchant or entrepreneur in Brussels will advance the capital. He will, directly or indirectly, pay all the spinners and lace makers, and a portion of the labor of those who make their tools. All those who have taken part in the work will then buy, directly or indirectly, their sustenance from the farmer in Brabant, who will use the money to cover part of his rent to the property owner. In this economy, if one estimates that these 2,000 persons need three acres of land per capita for their maintenance as well as that of their families, then six thousand acres of land in Brabant will be required to support those who have worked on the lace, at the expense of the ladies in Paris who will buy and wear the lace.

The ladies of Paris will pay the 100,000 ounces of silver, each according to the quantity of lace she has bought. All this silver must be sent to Brussels in specie, less only the cost of shipping. The entrepreneur in Brussels must find that it not only pays of all his advances and the interest on the money that he has perhaps borrowed, but also a profit for his enterprise and the upkeep of his family. If the price paid by the ladies for the lace does not cover all the costs and profits, there will be no incentive for this business, and the entrepreneurs will cease production or become bankrupt. However, if we assume that this manufacturing continues, all costs must be covered by the prices paid by the ladies of Paris, and that 100,000 ounces of silver must be sent to Brussels, if the people of Brabant receive no commodities from France as compensation.

However, if the inhabitants of Brabant are fond of Champagne¹¹⁵ wine and consume 100,000 ounces of silver worth of wine every year, the wine products will compensate for the lace, and the balance of trade for these two branches will be equal. This compensation and circulation will be achieved through entrepreneurs and bankers who will participate in this trade.

The ladies in Paris will pay 100,000 ounces to whoever sells and delivers the lace to them; the seller will then give the money to a banker who, in exchange, will give him one or more bills of exchange¹¹⁶ redeemable by the institution’s correspondent bank in Brussels. The Paris banker will then give the money to the Champagne wine merchants who have accumulated 100,000 ounces of silver in the Brussels bank. In return, the wine merchants give the Paris bank their bills of exchange—of the same amount—to be redeemed from their account with the correspondent bank in Brussels. Thus the 100,000 ounces paid for the Champagne wine in Brussels will compensate for the 100,000 ounces paid for the lace in Paris, and in this way, the trouble of sending to Brussels the money acquired in Paris, and to Paris the money acquired in Brussels, will be avoided. This compensation is achieved by using bills of exchange, the nature of which I will try to explain in the next chapter.

From this example, we can see that the 100,000 ounces paid by the ladies of Paris for lace comes into the hands of the merchants who send Champagne wine to Brussels, and that the 100,000 ounces consumers paid for Champagne wine in Brussels comes into the hands of lace merchants. The entrepreneurs on each side distribute this money to those who work for them, either in the wine or the lace business.

It is clear from this example that the ladies in Paris support and maintain all those who produce the lace in Brabant and that they cause money to circulate there. It is also clear that the consumers of Champagne wine in Brussels support and maintain, in Champagne, not only the winemakers and others who work in the production of the wine, but also the wagon makers, blacksmiths, and wagon drivers, etc., who take part in its transport, as well as the horses they use. They also pay for the value of the land used to produce the wine, and cause a circulation of money in Champagne.

However, this circulation or trade in Champagne, which is so stimulating and which maintains the winemaker, the farmer, the wagon makers, blacksmiths, and wagon drivers, etc., and which pays the rent of the vineyard owner as well as that of the owner of the pastures that serve to feed the wagon horses, is, in the present case, an expensive and disadvantageous trade for France when taking the effects it produces into consideration.¹¹⁷

If a barrel of wine¹¹⁸ sells for sixty ounces of silver in Brussels and if we assume that one acre of vineyard produces four barrels, the production of 4166.5 acres of land must be sent to Brussels to equal 100,000 ounces of silver, and about 2,000 acres of pasture and cropland must be employed for the hay and oats consumed by the wagon horses, if they are solely used for this purpose year round. Therefore, approximately 6,000 acres of land will be relinquished from the subsistence of Frenchmen and the people of Brabant will gain the production of over 4,000 acres, since the Champagne wine they drink saves them more than 4,000 acres of land they would likely use to produce beer, if they did not consume wine. However, the lace used to pay for all this costs the people of Brabant only one quarter of an acre of flax. Therefore, with the production of one acre—combined with their labor—the people of Brabant buy more than 16,000 acres worth (combined with less labor) from the French. They obtain an increase in subsistence and only give an article of luxury, which brings no real advantage to France since the lace is worn and consumed and cannot be exchanged for anything useful afterward. Following the rule of intrinsic values, the land used in Champagne for wine production, the maintenance of the winemakers, the coopers, the wagon makers, blacksmiths, wagon drivers horses, etc., ought to equal the land used in Brabant for the production of the flax, the support of the spinners and lace makers, and all those who have taken part in the production of the lace.

But if money in circulation is more abundant in Brabant than Champagne, land and labor will be at higher prices there and, as a result of the valuation in terms of money that takes place on both sides, the French will lose even more.¹¹⁹

In this example, we see a branch of trade that strengthens the foreigner, lessens the number of inhabitants in the state, and, without causing any money in circulation to leave, weakens this same state. I’ve chosen this example to better show how one state may be the dupe of another in trade, and to show the method of judging the advantages and disadvantages of foreign trade.

It is by the examination of the effects of each particular branch of commerce that foreign trade can be usefully regulated.¹²⁰ It cannot be distinctly known with generalizations.

One will always find, when examining particular cases, that the exportation of any manufactured goods is advantageous to the state because the foreigner always pays and supports workers who are useful to the state. The best returns or payments which one receives are in specie, and in default of specie, foreign products that require less labor. By these trading methods, states that have very little raw materials can support a large number of inhabitants at the expense of foreigners, and large states can maintain their inhabitants in greater ease and abundance.¹²¹

Great states have no need to increase the number of their inhabitants; they only need to support their citizens with domestic production, and in more ease and comfort, and to increase the strength of the state in terms of defense and security. To achieve the same result by foreign trade, the exportation of the state’s products and manufactured goods must be strongly encouraged, in exchange—as often as possible—for gold and silver. If an abundant harvest creates a surplus of production in the state above the usual annual consumption, it would be advantageous to encourage its exportation in return for its value in gold and silver. These metals are nonperishable, they do not spoil like agricultural products, and gold and silver can always be used to import into the state what it does not have.

However, it would not be advantageous for the state to annually send great quantities of its agricultural products abroad in return for foreign manufactured goods. This would both weaken and decrease the number of inhabitants and the armed forces of the state.

It is not my intention to describe the branches of trade that should be encouraged for the good of the state. I’ll simply say that the importation of money should be the goal.

An increase in the quantity of money circulating in a state provides great advantages in foreign trade, so long as this abundance of money lasts. This allows the state to exchange a small quantity of products and labor for a greater one. It levies its taxes more easily and finds no difficulty in raising money in case of public need.

It is true that the continued increase of money will, in time, and by its abundance, cause land and labor costs to rise in the state. Products and manufactured goods will, in the long run, cost so much that the foreigner will gradually cease to buy them, and will adjust to buying them cheaper elsewhere. By imperceptible degrees, this will ruin the businesses and manufactures of the state. This same cause (the abundance of money) will raise the rents of property owners and will put them into the habit of importing many articles from foreign countries where they can be purchased for less. These are natural consequences. The wealth acquired by a state through trade, labor, and economy will gradually plunge it into luxury.¹²² States that rise by trade do not fail to sink afterwards. There are steps that might be, but are not, taken to stop this decline. But it is always true that when the state has a positive balance of trade and an abundance of money, it seems powerful, and it really is as long as this abundance continues.

Infinite inductions could be added to justify these ideas of foreign trade and the advantages of abundant money. The disproportion of money in circulation in England and in China is astonishing. Despite an eighteen-month sea voyage, goods from the Indies, like silks, colored calicoes, muslins, etc., sell for a very low price in England, and could be paid for with the thirtieth part of her articles and goods, if the Indians would buy them. But they are not so foolish as to pay extravagant prices for our products while work is done better and infinitely cheaper in their own country. So they sell us their goods only for cash money, which we annually carry to them, increasing their wealth and diminishing our own.¹²³ Indian goods consumed in Europe only reduce our money and the work done by our own manufactures.

A [Native] American who sells beaver skins to a European is surprised, and rightly so, to learn that woolen hats are as good as those made of beaver, and that all the difference, which causes so long a sea journey, is in the mind of those who think that beaver hats are lighter and more pleasant to the eye and the touch. However, as these beaver skins are ordinarily paid for to the American in articles of iron, steel, etc., and not in money, this trade is not injurious to Europe, especially since it supports workers and particularly sailors, who are very useful to the state, while the commerce of goods from the East Indies exports money and diminishes the number of workers in Europe.

It must be acknowledged that the East Indian trade is profitable to the Dutch Republic and that she makes the loss fall on the rest of Europe by selling the spices and goods in Germany, Italy, Spain and the New World, for a profit well beyond the amount she sends to the Indies. Holland even finds it useful to clothe her women and other inhabitants with Indian fabrics rather than with English or French fabrics. It suits the Dutch better to enrich the Indians rather than their neighbors, who could use it to oppress them. Moreover, they sell the cloths and small manufactured goods that they produce to other Europeans for more than what they pay for the Indian goods consumed in Holland.

England and France would be mistaken to imitate the Dutch in this respect. These kingdoms have the means to clothe their women with their own products, and though their fabrics are more expensive than Indian-made ones, they should prevent their people from wearing foreign fabrics. They ought to prevent a reduction of their own articles and goods and not become dependent on the foreigner, still less allow their money to be taken away for that purpose.¹²⁴

But as the Dutch find means to sell Indian goods in the other states of Europe, English and French should do the same, whether to reduce Holland’s naval power or to increase their own, and above all, to do without Holland’s aid in the branches of consumption that a bad habit has made necessary in these kingdoms. It is a visible disadvantage to allow the wearing of Indian fabrics in the kingdoms of Europe that have the means to clothe their people with their own products.¹²⁵

Just as it is disadvantageous for a state to encourage foreign manufactures, so it is also to encourage foreign navigation. When a state sends its articles and goods abroad, it can obtain the full advantage if it sends them in its own ships. This way, trade supports a large number of sailors, who are as useful to the state as workers. If it leaves ocean transportation to foreign vessels, it strengthens foreign navies and weakens its own.¹²⁶

Navigation is an essential aspect of foreign trade. In all of Europe, the Dutch are those who build ships the cheapest. In addition to the rivers that they use to float timber downstream, their proximity to the north¹²⁷ supplies them with less expensive masts, wood, pitch, rope, etc. Their mills for sawing wood facilitate the production. In addition, they navigate with smaller crews and their sailors live very cheaply. One of their windmills for sawing wood saves the labor of eighty men a day.

With these advantages, they would be the only sea carriers in Europe if cost alone mattered. And if they had enough resources to develop an extensive commerce, they would doubtless have the most flourishing merchant marine in Europe. However, their large number of sailors is not sufficient to make them a superior naval power because their state lacks internal strength. Even if they had the large revenues necessary to build and man war vessels, they would not do so because they profit from the expansion of trade.

In order to prevent the Dutch—with their low-cost advantage—from expanding their shipping business, England has forbidden any nation from importing goods that it did not produce. This precludes the Dutch from shipping to England and thereby strengthens the English shipping business. The English do ship at a greater cost than the Dutch, but the wealth of their overseas cargoes offsets some of these costs.¹²⁸

France and Spain are maritime states that have a large part of their production sent to the north, from which they also acquire goods and merchandise. It is not surprising that their navies are insignificant in proportion to their production and the extent of their coasts, since they leave it to foreign vessels to import all the goods they receive from the north and to export the goods they send to northern states.

These states, France and Spain, do not take advantageous trade considerations into account in their policy. Most merchants in France and Spain who deal in foreign trade are usually the agents or clerks of foreign merchants, and are not entrepreneurs carrying on trade with their own funds.

It is true that northern states, by their location and proximity to countries that produce all that is needed for shipbuilding, are in a position to transport everything cheaper than France and Spain. However, this should not prevent these two kingdoms from taking steps to strengthen their shipping. England has long shown them the example. They have at home and in their colonies all that is needed for the construction of ships and it would not be difficult to get ships built there. There are a variety of methods that could be used to make such a policy successful if the legislature or state department would work towards that goal. My subject does not allow me, in this essay, to examine these methods in detail. I will simply say that in countries where trade does not support a large number of ships and sailors, it is almost impossible for the prince to maintain a flourishing navy without ruining the state treasury with large expenditures.

I will conclude by pointing out that the most important form of trade for the increase or decrease of a state’s power is foreign trade. The domestic trade is not equally important politically. Foreign trade is only halfheartedly supported when attention is not paid to increasing and maintaining large merchants who are natives of the country, ships, sailors, workers and manufacturers. Above all, a balance of trade must be maintained against the foreigner.

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¹¹⁵ Region of France located just east of Paris.

¹¹⁶ A check or bank draft used in international trade that is an order written by one person to pay another a specific sum on a specific date in the future. In this case the Paris bank is giving the lace dealer a bill of exchange that can be cashed at the Brussels bank.

¹¹⁷ French apparell and luxury goods industries were highly regulated and monopolized by French mercantile policy during this time period so that such luxury goods had to be imported even though France probably had a comparative advantage in them.

¹¹⁸ A “muid” or barrel of wine contains 288 pints or 36 U.S. gallons.

¹¹⁹ Cantillon would later show that there is a market mechanism that regulates the flow and circulation of money between nations. However, France suffered several bouts of artificial shortages of money resulting from attempts to exploit money holders by the monarchy.

¹²⁰ The word “regulated” does not imply government regulation of international trade. When Cantillon used the word “régler” he was usually refering to some form of market harmonization a la supply and demand.

¹²¹ Cantillon has previously demonstrated why manufacturing workers receive higher wages than unskilled workers and how those wage rates are harmonized by market forces.

¹²² Cantillon was not opposed to luxury goods and fine living. Indeed he seemed to be a luxury goods enthusiast. When he uses the term luxury what he seems to be refering to decadence and living beyond one’s means.

¹²³ Asians have traditionally saved by accumulating jewelry made of precious metals (see Rissman 1988).

¹²⁴ France was practicing a severe form of mercantilism at the time, which, among other things, made the manufacture of cloth and fabric very expensive; the industry was tightly regulated and heavily monopolized. For example, the type of cotton fabrics that were being imported into Europe and smuggled into France—printed cotton calicos—were prohibited from being manufactured in the country (see Ekelund and Tollison, 1981).

¹²⁵ This would appear to be an implied criticism of French mercantile policy that restricted the production of certain fabrics in an age when direct criticism of the monarchy would land you in jail or worse.

¹²⁶ This was a time period when England, France, Holland, and Spain were all involved in a mercantilist war, each vying to dominate the world’s oceans, colonies, and trade routes. A most important component of a country’s navy was its merchant marine, which could easily be transformed into commerce raiders during a war. A nation that lacked a merchant marine would be greatly disadvantaged.

¹²⁷ Here Cantillon is probably referring to the lowland countries of Belgium and Holland, the area now known as Germany, as well as the kingdoms of Denmark and Sweden.

¹²⁸ Cantillon is endorsing the English Navigation Acts, which targeted Dutch shipping and increased the merchant marine of the British empire. This endorsement, which was later echoed by Adam Smith, is not made on the basis of protecting domestic shipping, but as a measure that would help ensure that there would be enough sailors and ships in times of war.