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141 Annals Am. Acad. Pol. & Soc. Sci. 1 (1929)

handle is hein.cow/anamacp0141 and id is 1 raw text is: The Basis of International Trade By HARRY T. COLLINGS Professor of Commerce, Wharton School of Finance and Commerce, University of Pennsylvania I NTERNATIONAL trade is based on the territorial division of labor. In this respect it differs not at all from domestic trade. International trade arises because a country specializes in the production of certain goods and services and thus produces more than enough to supply the domestic demand. Obviously it must export the surplus to continue the specialization. To receive a return for its exports, a coun- try must ultimately import either goods or services. Imports pay for exports -both of which may consist of services as well as of goods. Services, the so- called invisible items of interna- tional trade, have occasioned confusion in the minds of many because until recently only the commodities actually exchanged have appeared on the na- tional trade balances. While the bases of foreign and domestic commerce are thus the same, international trade is far more complicated because of new fac- tors which enter into the transactions. False theories, nationalism, differences in language and customs, so complicate exchange of goods between nations as to make impossible a comparison with domestic trade. In no field of economics have more misleading theories prevailed than in international trade. The doctrine of caveat emptor long prevailed in domestic trade; it still persists in foreign com- merce. Men for years insisted that what a buyer gained by purchase, the seller must necessarily lose. The argu- ment appealed to reason as a most logical deduction under the law of compensation. It later became evi- dent that values might not be the same for any one good to two different peo- ple-in other words, that the marginal utility of a commodity differed for different people according to their need at the particular time, or to their supply relative to this demand. Both seller and buyer may, and usually do, actually gain from a trade because of the differing utility of the purchase to each of them. But national bounda- ries seem to vitiate this argument of gain to both parties. It seems untrue when one party is a foreigner. MERCANTILISM The persistence of erroneous thinking in foreign trade matters is partially attributable to theories of exchange current centuries ago. Mercantilism, which took root early in economic thinking, dominated this field subse- quent to the seventeenth century. This theory had many phases since it related to the entire business activity of a nation. In reference to interna- tional trade its tenets may be stated in simplified form somewhat as follows: The infallible index of national pros- perity was an increasing national supply of the precious metals. The more gold and silver a country pos- sessed, the richer, the more powerful and consequently the more progressive it was. This overestimation of the economic significance of money was the salient error of mercantilism. It led to the promulgation of certain tenets which have dominated, and still dom- inate to some extent the thinking of the man in the street regarding exports and imports. In harmony with the view that money is the index of prosperity, mer- cantilism held that it must be the

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