7: Foreign Trade
Foreign trade does not increase or diminish the amount of value in a given nation. The very notion of "trade" is the exchange of items that are considered by those involved in the bargain to be of equal value - thus any value that comes into the land from abroad results in a domestic good of equal value being sent abroad, and the total amount of domestic value is not diminished or increased.
Granted, this is sophistry: the value of land, labor, and capital in foreign markets may be different than the domestic, such that the same money-price commands a greater or lesser quantity of goods at a given moment in time based on how the value of inputs differs in a foreign market than a domestic one. And in that way we might conclude that more or less goods move between one nation and another, and more or less prosperity enjoyed as a consequence, their values to buyer and seller remain in perfect balance.
Foreign traders, those who arrange trades of goods between market, often take as their profit some of the difference, are likewise neither creative nor destructive of value. They buyer in one land and the seller in another each accepted and paid according a price that was fair in their own estimation for the good. It is sometimes observed, with some consternation, that the merchant could have sold the goods for less or paid more for them, but those involved in the exchange were perfectly happy with the agreements into which they entered at the time.
(EN: It's also worth mentioning that there seems to be a special level of consternation where trade takes place across national borders. Where merchants turn a profit by moving goods between towns in the same nation, there is little concern and they are even praised for helping stimulate the domestic economy - but place an arbitrary political border between the two and there arises a clamor that is, in essence, entirely pointless.)
Foreign trade is also the result, rather than the creator, of demand. Where there is demand for a good in a given nation, beyond its ability to produce that good for its own consumption or beyond the willingness of capitalists to invest in its production at a price customers are willing to pay, it is sought of foreign markets. The cheapness of foreign commodities pressures the domestic producers to seek a way to produce these same goods at a competitive price, or divert their capital to activities at which they have greater competence, and offer these goods in exchange for the desired commodity that is more efficiently produced abroad.
Another consequence of cheaper foreign goods is that domestic consumers spend less of their income on the purchase of needed goods, and a greater proportion on other items manufactured domestically. Though it is also true that the greater proportion of the domestic budget is spent on foreign goods, in the aggregate, the less of it remains to be spent on the product of the domestic market.
But neither does this diminish the welfare of the people, in the extreme case where 100% of domestic consumption is of foreign goods and 100% of domestic production is for goods that will be exported in exchange. It merely shifts the location of the manufacture of those goods - based on the same principles that guide a person, a town, a region, or a nation to specialize in the tasks at which they are most productive.
The author also draws an analogy to using more efficient machinery: saving 20% in the production of a good by importing foreign materials is essentially no different from saving 20% by the employment of more efficient machinery. The effect on the profit of the manufacturer is no different, either: he temporarily gains a benefit until such time as his competitors become more efficient as well, or new competitors enter the market in pursuit of a higher profit, and the competition in the market for prices lowers to revenue of sale.
From the perspective of the consumer, it cannot be denied that a consumer enjoys greater benefit from the ability to purchase goods more cheaply - to have more of the things he wants, or to satisfy his necessities and have cash "left over" to purchase luxuries for his own comfort. And it is obvious that the cheap and plentiful necessities are of benefit to all, though there is more consternation when imported goods are luxuries and the benefit is enjoyed only by the wealthier classes (though such luxuries would then also be more affordable to those with less wealth).
From the manufacturer's perspective (and certain skilled laborers), it may be argued that foreign trade is harmful to domestic industry, though this is a matter of resistance to the stark reality that they are not as efficient as foreign producer, and are unwilling to abandon a given activity at which they perform poorly to seek an alternative use of their capital at which they have greater competence.
Aside of capital and labor, there are issues of land, in which land in a given location is not conducive to the production of certain crops. Wine grapes cannot be cultivated in England without great effort, and then the outcome is of lesser quality than those produced in Portugal - meanwhile the same could be said of any attempt to cultivate cotton or wheat in Portugal. It is better for both nations for each to do what they are best capable of doing and trade their product for that of the other.
Free and unrestricted commerce among nations, just as free and unrestricted commerce among men of the same nation, encourages each individual to devote his labor and capital to such employments as he is best capable. And where an individual is not capable at anything, it encourages him toward self-improvement. Where trade is restricted, the opposite results: individuals are not encouraged to quit employments at which they are not capable - or said another way, individuals are encouraged to engage in pursuits that are wasteful of effort that could be better spent on other tasks.
There is also an implication that free trade among nations encourages peace among nations. Each body of people benefit from the work of the other, profit by the exchange, and are interested in perpetuating peaceful and uninterrupted relations. Interference in this process creates hardship and resentment to the greater number of citizens of both importing and exporting nations.
While the importing nation seeks an advantage by getting cheap goods from foreign markets, the exporting nation seeks to divest itself of goods that are less wanted there, to the degree that the local market will pay as much for them as will buyers elsewhere. If a seller could strike a bargain with a local buyer at the same price, he would certainly save the expense and inconvenience of export.
Trade among nations is not fixed and permanent, but depends on these efficiencies. If England were to discover a way to produce wine domestically at a price lower than it could be imported, then it would cease to be imported. This does not effect a change in price of any other commodity - Portugal would still buy English cloth, though England no longer needed Portuguese wine, but would offer some other good in trade for it where it is produced with greater advantage in Portugal than England.
In practice, it is far more complex - it is not the direct exchange of one good for another, but the aggregated effects of a multitude of different goods that are imported and exported among them.
There is brief and oblique mention of the exchange of precious metals between nations as method of payment of goods, and also of the clearinghouse process for commercial bills, such that import and export can balance at the customs-house without shipping the metal in both directions - though any imbalance of trade will cause gold or silver money to be shipped from one nation to the other.
The movement of money in international trade reflects a compensation for imbalances - or a method of smoothing out the variations in the balance of trade: where England needs more wine of Portugal than Portugal needs cloth of England, money is used in trade as a token of value to substitute for goods in kind, until such time as England can provide more cloth, or more goods of any other kind, to Portugal in exchange for the value it imports. A nation can consume of others more than it offers in return only so long as its supply of money allows, at which point it will be compelled to find another method of providing value, or curtail its import of foreign goods.
(EN: This strikes me as a more sober and rational approach to foreign trade than the traditional panic, consternation, and distrust among nations that surrounds the issue in conversations among laymen. In effect, the concern over trade imbalance seems the irrational behavior of a debtor who was glad to receive credit, but becomes indignant when they consider that they must then repay it.)
The difference in the value of money among different nations is in some part due to the difference in prices of commodities in differing markets. Two nations of the same size and resources may have differing rates of exchange due to their productivity: where workers are more productive, they are more highly compensated for production of more goods, and can afford to pay a higher price in the market for the goods they produce. Hence the value of commodities, including money, is higher in an advanced economy.
(EN: This seems to reflect reality, though I am not sure I quite follow the logical connection. It could as well be reckoned that the money-wage of workers is the cause, as two markets of the same productivity would have the same relationship where the workers of one nation are paid more, and prices are higher as a result, in terms of money. I'm not sure that this can be untangled and attributed to a single factor.)
The value of money within each nation is subject to constant variations, and while certain factors may influence the value of money in multiple nations (a dry season strikes all of Europe), other factors impact each individually.
The stage of economic development also impacts the value of money: in early stages of development, a nation can produce no more than it can consume, with little for export. As it progresses, it will gain the ability to produce more than is needed for domestic consumption, though much of the national product is useful, but bulky or heavy (agricultural products, timber, mineral resources). With further development and improvement, it is able to create luxury goods that embody greater value for less bulk and have appeal as items of trade with foreign nations.
(EN: this may be a general truth, though my sense is that even in the early stages, there are certain goods that are produced for export rather than domestic consumption. Those who prospered in the earliest days of the Americas sought to produce high-value trade goods immediately: tobacco, sugar, and gold were exported from the new world to the old before even much agricultural development occurred.)
Ricardo wishes to differentiate between a low value of money and a high value of commodities. Because goods are priced in terms of money, it is difficult to distinguish whether, when the price of a good increases, it is because the commodity has become more valuable or money has become less.
The value of a commodity can be isolated from the value of money by comparing its cost to other commodities. That is, where corn and wheat both rise in price, it is money that has lost value, but where corn rises and wheat does not, it is corn that has become more valuable. The opposite may also be said to be true, though "less valuable" is not necessarily a function of its utility, but that some efficiency in its manufacture has made it less expensive to produce in greater quantity.
Prices rise in general when there is a decrease in the value of money - in that money is backed by precious metals, and their abundance, like the abundance of any commodity, decreases its value in exchange for all other commodities. In an extreme case, where a nation refuses to honor its currency, the currency itself becomes worthless in trade. In other instances, a company may tax the exportation of money, decreasing its value in foreign markets. There are a myriad of ways in which a nation may choose to tamper with its money supply, especially with the introduction of paper currency, whose exchange value for metal may be altered at a whim.
The exchange rate for currencies is often done without regard to the comparative value of money in either nation. This can be confounding, as there is no reason that one unit of currency of one nation is intrinsically worth one unit or two units of another nation's. To determine exchange rate, individuals generally consider money in terms of the value of the bullion it represents. Even this is a "plea that admits no proof" and cannot be positively confirmed or contradicted.