CHAPTER III. THE BALANCE OF TRADE.

The constant excess in our Imports over our Exports is due to statistical necessities. It is explained, from the side of exports, (1) by shipping charges; (2) by bankers’and other commissions—these two are “invisible exports”: from the side of imports, (3) by returns on capital lent and invested abroad; (4) by boarding expenses, and by some smaller items.

ALLOWING for time and accidental disturbances, there should, apparently, be equivalence in value between the Exports and Imports of a country.

No sooner, however, do we get this length in deductive reasoning than we have to face the fact that, according to the last statistics, Spain is the only country whose exports and imports do balance each other. Germany has a balance of Imports over Exports of some £57 millions; France, some £23 millions; Holland, £22.4 millions; Belgium, £12 millions; Italy, £8.7 millions; Norway, £7 millions; Denmark, £6½ millions; Sweden, £6 millions; Portugal, £5 millions; Japan, £5.8 millions. On the other hand, the United States has a balance of Exports over Imports of £118 millions; Russia, £9 millions; Austro-Hungary, £6 millions; Egypt, £1.6 millions; Argentine Republic, £7.7 millions; Chili, £3.3 millions; Uruguay, £1.5 millions.¹

This is the phenomenon called the Balance of Trade, of which we hear so much.² Practically every country has a balance the one way or the other, and, as a rule, the balance is a persistent and not a passing one. And the state of the case with us is that, taking the average of the last ten years, excluding bullion and specie, our country shows a Balance of Imports over Exports of £155,000,000, or, taking 1902, £179,000,000. If, however, exports tend to be equivalent in value to imports, how is this balance to be explained?

I. The first item in the explanation is not very difficult to understand. Those who love things in the concrete might consider what would be the state of imports and exports in Tyre when the Phoenician fleet set sail from the east, with cargoes of dyed wool, gems, and spices, and, after many days, brought back tin and other products of the western isles. If the voyage were conducted on commercial principles, the imports would exceed the exports in value.

In international as in home trade, payment is made for goods, not only by other goods but occasionally by Services—just as a physician may square his butcher’s bill by medical attendance on the butcher’s family. It happens that there is a trade, and a great trade, which is carried on outside our national boundaries, and, equally, outside the boundaries of any other nation—on the No Man’s Land of the sea. It is peculiarly a British trade. But it has no material product. It is a transport service—the service of ocean carriage, including insurance. It sums up a great number and variety of costs incurred after goods have left our shores, or other shores, as statistical exports, and these costs must be added to the selling price of the imported goods if other nations are to get our goods, and if we are to get other nations’ goods.

Where these Services, then, are rendered to foreigners by persons residing in Great Britain, they must be paid for to Great Britain. They are paid, as usual, in goods, and the payment appears as an import against which there is no export recorded in our official trade returns—for, as I say, this trade is carried on outside the national boundaries.

It is merely another way of stating this, to say that our Exports are entered F.O.B. and our Imports C.I.F. In the official returns of imports and exports, occur the words: “The values of the Imports represent the cost, insurance, and freight; or, when goods are consigned for sale, the latest sale value of such goods. The values of the Exports represent the cost and the charges of delivering the goods on board the ship, and are known as ‘free on board’ values.” In other words, our Exports are entered at home prices—that is, free on board ship—the same prices at which they would be delivered to a warehouse in this country. But they appear as Imports in other countries at our home price plus freight and insurance. On the other hand, goods which appear in the official books of other countries as their Exports at their “free on board” price, are entered in our official books as Imports at their foreign or exported price plus freight and insurance. Thus, where our ships carry the goods, the exports will always appear as less than the imports which pay for them by the amount of the freight and insurance.¹

One can see the reason of Sir Robert Giffen’s suggestive name for this—“Invisible Exports.” Suppose that neither England nor France owned any ships; that all the trade between the two was conducted by the Channel Islands; and that these islands did no other foreign trade—as was very much the case with Venice in old days—would it not be true that the Channel Islands’ official returns would show all imports and no exports? And if the Channel Islands’ returns were not entered separately, but lumped with the British returns, would there not be a permanent excess in our statistical imports over our statistical exports, while France showed a balance the other way about?

It may be expected, then, that a nation which owns half the world’s shipping, and carries for foreigners as well as for British merchants, will be paid a very large sum for this service. The amount was estimated by Giffen, in 1898, as £90,000,000. An independent calculation,² on quite different lines, was put forward by the Board of Trade in 1903, and makes it £89½ millions.¹

This is the first item which explains our apparent Balance of Imports. Our exports are really £90,000,000 more than the statistical exports shown by the official returns.²

II. There is another Export of Services, or Invisible Export, which works out in the same way. It is not only ships that do business outside the boundaries of our country, but Men.

If a journalist, sitting in his study in London, writes an article for a German newspaper, that newspaper has, presumably, to pay him. His export of service goes under a postage stamp, but the value of what is contained in the wrapper is not, one may hope, represented by the stamp. If the German paper pays him by sending a couple of guineas’ worth of German books, then this is an import of goods, although, as passing through the post it would not appear among official imports.

This is merely an illustration of the fact that there are very large classes in this country who perform services for foreigners which have no embodiment in material goods. If one considers what is involved in the statement that London is the clearing house of the world—that a bill or draft on London is the best and most widely known form of international currency—one will understand that British bankers, sitting in London, do business all over the world, and that the payment for these services must come in goods, or in other services. But, besides bankers, there are the fire and life insurance companies, and the great army of commission merchants, who do business very much in the same way.

Services like these cannot be put into statistical figures—there is no possible means of getting at them—but, the more one considers the magnitude of this business, the more one will be disposed to say that several millions should be added to our statistical exports on this account.

One may question the exactness of any figure put on these invisible exports—take a few millions off it, or add a few millions to it. But a country which does half the shipping trade of the world, and is, at the same time, the headquarters of the banking trade of the world, must have a very large sum due to it by way of payment, and this must come in some valuable shape. If it does not come in imports of goods or services, in what does it come? Or where does this “invisible” export appear as a statistical export?

III. There still remains a good deal to make up the Balance. But there still remains a large department of international relations which has not yet been taken into account. Nations buy from and sell to each other. But they are also connected with each other as debtors and creditors. Let us see how this affects imports and exports.

The third item of the balance is due to the fact that we have, notoriously, been lending to all the world and investing capital all over the world, and that the returns come home annually in the shape of goods.

How much our capital lent and invested abroad may amount to, is a matter of rather rough calculation. It is variously estimated from £2,000,000,000 to £2,500,000,000.

The corresponding returns which pay income tax in our country amount to £62½ millions, but this includes only the interest on foreign and colonial securities, coupons, and railways. To this must be added the dividends on miscellaneous industrial undertakings abroad. After all deductions on account of other countries which have lent and invested capital with us,¹ we may accept the Board of Trade conclusion that “£62½ millions is a minimum figure, which is probably largely exceeded.” In 1898, Sir Robert Giffen estimated it at £90 millions, and probably more.¹

It will be noticed that, while the Invisible Exports should be added to the statistical exports, the income from capital invested abroad takes shape as, and accounts for, a permanent excess of Imports. In other words, if from this moment we stopped lending and investing abroad, we should still receive, year after year, till the capital was repaid, some £60 to £90 millions worth of value, and most of that value would be embodied in goods.

It is not quite correct to say that this represents an import against which there is no export. In many cases, there may have been an export of goods, at the time when the loan was made, to the full amount of the loan, as, for instance, when a colonial government borrows to build a railway, and gets the rails and rolling stock from England. It may, on the other hand, represent no sending of goods at all. If India wants to borrow another million from us, and is owing us £18 millions a year as it is, all she has to do is to lay hands on a million’s worth of goods that otherwise would have come home to us as imports, and keep them—in which case the loan would take shape as a diminution of imports into this country.

The point to emphasise is that, in any case, the contracting of the debt, or the investment of the capital, is in the past. But the obligation to pay the interest is a permanent obligation to export a stream of value from foreign countries to our shores as imports.

Here, again, one may question the exactness of the figures. But if Great Britain has sent out capital to other countries and these countries have not sent a corresponding amount of capital to it, it seems undeniable that there must be a permanent excess of imports into Great Britain to pay the interest.

IV. There is another class of Imports which stands on the same line with the returns from capital invested abroad. It has been happily called “Boarding Expenses”—values sent from one country to another, not to sell or invest, but to consume. This is not a small item. Italy has been credited with £14,000,000, and Switzerland with £8,000,000 spent by sightseers. Americans are said to spend some £20,000,000 a year in foreign travel. How much of such boarding expenses comes to this country, it is impossible to say, but it must be very large. London is the centre of the world, where everybody who can afford it goes once in a lifetime at any rate. Our own Highland hotels get a considerable share. This category includes remittances sent home to families and schools in England by Civil Servants and military men abroad, furlough expenses, and the like; and under it, perhaps, fall professional earnings of Englishmen temporarily abroad, such as the gains of theatrical and concert companies on tour. These all represent imports against which there is no corresponding export.¹ It must, however, be remembered that large sums are sent abroad by us to other countries for similar purposes, and, as Englishmen travel perhaps more than any other nation, the imports on this account may not very greatly overbalance the exports.

Smaller or more occasional items are:

(a) The price of old ships sold on the high seas. It is well known that we are continually selling our ships and replacing them with new ones, and these ships do not appear as exports.¹

(b) Profits which accrue from capital that was neither lent nor invested abroad, but is yet owned. There are many businesses, or branches of businesses, which have grown up from small beginnings into dividend-paying concerns. Many Englishmen, again, own land in foreign countries which may have risen indefinitely in value owing to growth of population or the finding of minerals, etc.

(c) Gifts, Charities, and Subscriptions, such as the sums sent home from Irishmen in the United States.

All these go to swell the stream of imports against which there is no, or practically no, corresponding export. Together, they must run into many millions.

The summing up, then, is this:

Our Statistical Imports are £528,000,000. Our Statistical Exports are £349,000,000; to which fall to be added, at least, another £90,000,000 of Invisible Exports of shipping; making a total of £439,000,000. This leaves a Balance of Imports of £89,000,000. But it has been shown that what we should expect is from £60,000,000 to £90,000,000 of annual imports from capital lent and invested abroad, not balanced by any annual exports. All this is to leave out of account the many millions of imports which we receive as Bankers’ and other Commissions, as Boarding Expenses, and from the smaller items just mentioned.

The probability, in fact, is that our real Balance of Trade is the other way about from what it is usually considered to be; that it is a Balance of Exports. The excess may be accounted for by the fact that a good deal of interest and profit never comes home, but is invested as capital in the countries where it is made.¹

In all this, certainly, there is nothing to shake our faith in the deductive conclusion that, given the exceptions and disturbances noted above, Imports and Exports tend to balance each other.

¹The above figures are averages of the last five years, taken from the Statistical Abstract for Foreign Countries of 1903.

²The expression Balance of Trade is intelligible; not so, to modern ideas, the adjective “favourable,” applied to a balance of exports over imports, and “adverse” to a balance of imports over exports. The explanation is historical, and rests on the importance attached to gold and silver by early mercantilist writers. “Adverse” related to the effect, or supposed effect, of carrying gold and silver out of the country, caused by an excess of imports. The extraordinary importance attached to the precious metals was perhaps justified in times when there were no bankers; when Europe was starving for a sound currency, and industry hampered by the want of it. All countries took strong measures to attract and retain gold and silver; even Spain—the depot of these metals—prohibited their export under the most drastic penalties. When in time it was seen that such measures were useless, it was conceived that there was a more natural way of effecting the same object; if encouragement were given to exports while imports were handicapped, there would tend to be a “favourable balance”—that is, the excess of value would come in gold and silver; hence bounties on exports and duties on imports. So, said Adam Smith, “the attention of Government was turned away from guarding against the exportation of gold and silver to watch over the balance of trade as the only cause which could occasion any augmentation or diminution of these metals. From one fruitless care it was turned away to another, much more intricate, much more embarrassing, and just equally fruitless.” It is notable that, in this regard, duties on imports were not, primarily at least, intended for the protection of home industries so much as for the protection of gold and silver.

¹A convenient formula for this is as follows: Suppose that freight is 5 per cent. on the value of goods, and that our ships carry the goods both ways, then £100 worth of our exports appears as £105 worth of another country’s imports, and £105 worth of the other country’s exports appear as £110 worth of our imports.

²Memoranda, Statistical Tables, and Charts, with reference to various matters bearing on British and Foreign Trade and Industrial Conditions, p. 99. This is the Blue Book called out by the present fiscal enquiry (Cd. 1761), and published in August, 1903. It should certainly be in the hands of all who wish to make a serious study of the fiscal question. As I shall have constantly to refer to it, I may, for convenience sake, call it in future references the Board of Trade Blue Book.

¹Giffen’s calculation was first made in 1882 (Essays in Finance, Second Series, p. 132), and was revised in 1898 (Royal Statistical Society’s Journal, 1899, p. 11). His method was to take the British gross tonnage earnings at £15 and £5, for steamers and sailers respectively, at the former date, and at £12 and £4 at the latter. The Board of Trade, on the other hand, took the total exports and imports of the principal countries of the world, which are, of course, the same goods valued at points of departure and arrival; accepted the £224,000,000 difference in their value (see p. 41) as representing freights and insurance; halved this sum to represent our share of the carrying tonnage of the world; deducted 9 per cent. for colonial ships, and further deducted £12½ millions for coals and stores purchased abroad, harbour and other dues; and arrived at the figure of £89½ millions.

²The importance of Shipping as a British export industry may be realised by remembering that £90,000,000 is just about the value of our cotton and woollen exports combined.

¹“Unfortunately, there are no official figures with regard to the investments of foreigners in this country, though they are certainly very much smaller in the aggregate than British investments abroad. America is the only foreign country, so far as known, whichh as made important investments in the United Kingdom in recent years,” Board of Trade Blue Book, p. 102. On this whole subject, the admirable article in the Blue Book should be referred to.

¹Royal Statistical Society’s Journal, March, 1899. Giffen’s calculation, however, includes Pensions, etc., from India and other countries to civil servants living here, of which the Board of Trade says nothing.

¹At the risk of being tedious, I may repeat here that such boarding expenses involve sending of goods to pay for any balance there may be between countries. All the traveller knows, of course, is that he takes with him, say, circular notes, and, on presenting these, gets money of the country handed over to him. But, suppose that English tourists, in the course of a year, have cashed £100,000 of circular notes in Rome, and that Italian travellers have cashed £50,000 of their circular notes in London, the Italian and English bankers have simply honoured each other’s promises. England is now in debt to Italy to the amount of £100,000, and Italy is in debt to England to the amount of £50,000. The two sets of promises are set against each other, but there remains a sum of value of £50,000 due to Italian bankers. How is this to be paid? If the London bankers send drafts on London, this only gives the Italian bankers a claim on gold in London—promises to pay gold there. Even a Bank of England note is, after all, only a promise to pay gold on presentation of the note at the Bank. Some time or other, unless London is to run deeper and deeper in debt to Italy, the accounts must be squared. But, as has been demonstrated, it is usually more convenient to send Bills of Exchange than gold—that is, to give claims on goods sent to Italy in the ordinary course of business—in which case the real payment of the balance is in goods.

¹It should be noted, in comparing exports of past years with present figures, that new ships, sold from this country, were not included among our exports before the year 1899, and are properly excluded in comparisons with years before that date.

¹Compare the calculation of the French balance by Professor Gide: “As regards France, if, on the one hand, we put to her debit 4500 million francs of imports, 360 millions for carriage of that part of her merchandise which sails under a foreign flag, some hundreds of millions (say 500) for Frenchmen travelling abroad, or against French property held by foreigners—in all, 5400 million francs: and if, on the other hand, we put to her credit 4000 million francs of exports, 1100 millions as interest on capital lent or invested abroad, 600 millions for expenses of foreigners living in France—in all 5770 million francs; we see that not only is the required equivalence restored, but that there should remain a considerable surplus to her credit.”—Principes d’Economie Politique, 8th edition (1903), p. 283. See also Giffen’s remarks on the Balance of other countries: Royal Statistical Society’s Journal, March, 1899, p. 12.