4.6 Treaties of Commerce
When princes seek to intervene in the trade of their citizens with those of foreign lands, either to promote or discourage the import or export of goods, their inclination is to leverage the opportunity to exert authority over trade to benefit themselves in addition to, or in some instances instead of, their subjects. The agreements among nations are documented in formal treaties of commerce, which explicitly sate the terms of commerce between their subjects.
The use of trade agreements as a means to facilitate commerce is entirely unnecessary. Left to make their own arrangements, people would seek to trade when it is in their mutual advantage. This is no less true in international trade than it is in domestic. However, it is in the nature of treaties to imbalance trade among nations, in effect, to compel one party to trade at a disadvantage to the other, and further adjustments to such agreements are made to un-do the damage done by the original agreement, and in so doing lay claim to having granted a benefit.
Aside of the political leaders, there is also great benefit to merchants and manufacturers granted by a treaty a license to trade at a higher price or in greater volumes than consumers would normally desire of them. Prohibition of export gives merchants greater leverage in domestic markets, by virtue of the removal of foreign goods that are better in terms of quality and/or price, and bounties paid for foreign trade gives them an added measure of profit on selling goods abroad that could not be profitably exported under normal circumstances. Such merchants petition political leaders for trade agreements in their favor, and disinform the public of the benefit to the market to gain popular support.
In some instances, treaties of commerce are intended to grant advantages to friendly nations. The desire of the people for certain imported goods is acknowledged, and the rulers seek to limit commerce to specific states in favor of others.
Case Study: Britain and Portugal
Smith presents the treaty between England and Portugal for the exchange of wine and wool as evidence: it simply states that the citizens of the nation can export to one another wine and wool without restriction or duty, which is entirely benign. It's noted that the treaty did not establish a new trade between Britain and Portugal, so much as it remedied a collapse of trade resulting from contention of political leaders of the nations some generations prior.
Even so, the language of the treaty also restricts the ability of Britain to obtain the wine of other countries, whence might be had better quality, greater quantity, and fairer price. It does not place upon Portugal the same restriction in regard to wool, granting to Portugal and its citizens a clear trade advantage - though the reason for this being that Britain was more eager to establish trade among the nations in order to obtain a measure of the gold that Portugal was obtaining from its conquest of Brazil.
Smith finds the evidence of success to be wildly exaggerated (were the packet-boat from Lisbon to London to carry as much gold as sources claimed, it would exceed Portugal's entire income of Brazil), but fundamentally reasonable that some quantity of gold would flow from Portugal to Britain as a result of trade among the nations, there being an abundance of gold in Portugal and a dearth of consumer goods on which to spend it.
The treaty did much to enrich the crowns of both nations, and while it was commended for bringing into England a great quantity of gold (some suggested that almost all the gold of England came by way of Portugal), it is to be remembered that gold is but a token of trade. England could well have come by the same share of gold by trading its wool to other nations.
Digression: Gold and Seigniorage
Gold as a commodity is of little value in itself: it is not consumable nor of any use in manufacture. It is of some use in ornamentation, but is largely a token of commerce, valued for the goods that may be had in exchange for it.
The trade of the goldsmith most often consists in creating new plate that is made from old plate melted down. There is under most conditions very little instances in which gold is imported for the manufacture of plate.
The same is true of gold coin, which is pressed into coin or melted into bars as needed for commercial exchange. Where coin is produce at the expense of government, it is of equal value to its weight in metal, where seigniorage is applied, the fee for pressing coins add to their value in trade, by virtue of the certainty of their value - even in instances where the coin may become, through wear, below a standard weight.
In instances in which this is not true, i.e. the value of coin is less than the weight of the metal it contains, common practice is to meld down coin for its metal, a practice that government would prefer to discourage but is ultimately powerless to prevent. When act of state seeks to devalue currency thus, there arises a circular trade between the smith and the mint, in which coin is minted by day and melted by night.
Where private mints are employed, their profit comes from the seigniorage fee they charge for the work of making coins of metal. In most markets, seigniorage fluctuates between five an eight percent. This is effective in preventing the melting down of coin to produce metal (as it would be a loss of exchange value to do so), and by keeping seigniorage low, there is little incidence of counterfeit coin, the profit to be made being too low to incur the risk.
Smith does not discourage the practice of seigniorage. His notion that a profit upon the labor necessary to create coin from metal is no less an act of production, meriting compensation, than the manufacture of any finished good from any raw material.