ES6 — Balance of Trade

Nathaniel Smith
Aug 9, 2017 · 2 min read
Indeed this is an Italian wine, but nonetheless it was exported to England to be drank by Moi while on vacation.

In current political rhetoric much is made of the Balance of Trade. It is commonly believed that if a country imports more than it exports then it is left worse of off. It follows, in many people’s minds, that people with guns and legislative power should do something about this catastrophe. Clearly the choices that people are making in isolation are favorable, but in the aggregate the country is laid to ruins. Because of these incentives, Washington, Paris, London, Beijing, etc. should, by force, restrict the freedom of individuals and businesses in order to save the country, and if lucky, make the country great.

There is much to be said about the Balance of Trade (BoT) argument and why it is misguided, but today I will limit the discussion to Batiat’s retort.

Put succinctly, the BoT argument says that if France were to import 200 millions more worth of goods than it exports, it is made worse off by 200 million. Therefore, France should levy taxes and pass laws to limit the rights of French citizens to import.

Bastiat combats this theory with an example from the books of a French exporter/importer he calls M.T. According to the Customhouse M.T. exports 200,000 Francs worth of French goods and imports 352,000 Francs worth of American cotton. It follows that France is 152,000 Francs worse off, right? Even before we get into the profit and loss calculations that M.T. makes, I think it is plain to see that France is better off. They received 152,000 Francs more in product than they gave. Is this not the definition of profit? to buy low and sell high?

Yet when we turn to the books of the M.T. organization the evidence is all the more convincing:

Export: 200,000 Francs worth of French made goods.

Freight: 20,000 Francs

Duty: 60,000 Francs

Selling Price: 320,000 Francs

PROFIT: 40,000 Francs

Import: 320,000 Francs worth of American cotton

Freight, Commissions, etc.: 32,000

Selling Price: 422,400 Francs

PROFIT: 70,400 Francs

Here we see that the actual French company doing the importing and exporting is 110,400 Francs better off after the deal. It is a French company. Does this not make France wealthier?

Another example is presented:

M.T. exports 200,000 Francs worth of French goods. The ship is lost at sea. How doe this reflect on the books of the Customhouse? the M.T.?

The Customhouse renders France 200,000 Francs wealthier as they have exported 200,000 Francs worth of product and imported nil.

M.T. renders a 200,000 Franc loss, as they are now unable to recoup any cost from their venture.

Whose rendering is correct?

Nathaniel Smith

Written by

High School Economics Teacher and Lacrosse Coach

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