POLITICAL SCIENCE

QUARTERLY

THE NEW NORMAL IN FOREIGN TRADE

TH

HE year 1921 was the first since the outbreak of the war in which government credit operations did not directly and markedly affect our foreign trade. It therefore gives us some intimation what to expect when the world again. settles down to the humdrum routine of working and paying, after the mad orgy of fighting and borrowing and spending that extended from the beginning of the war up to the end of 1920. Sober examination of the new state of affairs is a condition precedent to any intelligent shaping of tariff and trade policy, shipping plans, investment schemes, political designs, and industrial and agricultural development.

During recent years the elementary theory of the balance of international payments has come to be far more widely understood in this country than ever before, but politicians and business men, for the greater part, still wander in Cimmerian darkness when it comes to making practical application of the doctrine. They are still interested almost exclusively in direct efforts to promote export trade or to prevent the products of foreign "cheap labor" from coming into competition with their own goods in their home market. They forget the truism on which the theory of international trade rests, namely, that failing bankruptcy or repudiation, the sum total of debits and credits in the foreign trade of each country must balance each

1 As the influence of government credit on our foreign trade was strongly felt during 1919 and 1920, those years, for purposes of trade study, are grouped with the war years proper. The term war period", as here used, accordingly covers the six and a half years from August 1, 1914, to December 31, 1920.

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year. In this sense, and in this only, "exports must pay fo imports." The international account may be summarized und five chief items: (1) exports and imports of merchandise (2) exports and imports of gold and silver; (3) interest r ceivable and payable; (4) payments for current services, suc as banking commissions, insurance premiums, ocean freight tourist expenditures, and immigrant and emigrant remittances and (5) the temporary loan or the permanent investment capital. For most modern countries in most years the sur total of the first four debit items is either greater or less tha the sum of the corresponding credit items, and the differenc is redressed by a corresponding entry on the opposite sid under the fifth item, that is, by the borrowing or lending o capital. This import or export of capital works to create corresponding import or export of goods.

During the years 1898-1914 the foreign trade of the United States was in a position of comparatively stable equilibrium Each year we exported nearly half a billion dollars' worth of goods more than we imported.' In addition, our net exports of gold and silver amounted to the inconsiderable average of eight millions a year. During these seventeen years, our total trade experienced a steady expansion, the value of imports more than doubling, and that of exports increasing in somewhat less proportion. The relation of export to import values, however, changed scarcely at all. An export excess, taking both merchandise and metals into account, averaging $584,000,000 during 1898-1901, was succeeded by an average of $451,000,000 during the next decennium, only to be followed by an average of $603,000,000 during the three years preceding the outbreak of the war. The changing character of our trade during these years has been the subject of frequent comFoodstuffs and raw materials formed an increasing proportion of imports, while our growing exports contained a constantly rising proportion of manufactured goods. Business was done at steadily rising prices, too, so the increase of trade

ment.

1 The yearly figures of excess exports varied from a maximum of $666,000,000 in 1908 to a minimum of $188,000,000 in 1910.

was less in volume than in value. For the present purpose, however, the important fact is the comparatively fixed difference between export and import values.

Excess exports of merchandise, gold and silver averaging half a billion a year were scarcely sufficient to balance the annual charges we had to meet on account of interest and current services, chiefly freight, tourists' expenditures, and the remittances made by immigrants to friends and relatives abroad. Writing in 1909, Paish made the following well-known estimate. of these items (all net):

Interest and dividends

Freight....

Tourist expenditures

Immigrant remittances

Total.

1

Paish calculated "that in a year of depression the obligation of the United States to other countries for interest, tourist expenditures, remittances to friends, freight etc., is about $500,000,000 and that in years of normal trade activity it is about $600,000,000." If in any year, then, the export excess did not reach these figures, the account was balanced by further borrowing. According to Paish's calculations, while we paid off a certain amount of our foreign debt during 1898-1901, the normal course of events was for capital to flow into the United States, and for repayments to be made but seldom. While other studies have tended to modify Paish's figures in detail, they have confirmed their substantial accuracy. In particular, the careful investigations of the Harvard Committee of Economic Research indicate that our net import of capital during the pre-war period probably averaged about $50,000,000 a year.3

'Paish, George, The Trade Balance of the United States (National Monetary Commission, 1910), p. 191.

Ibid., p. 192.

The results of these studies are of the highest value for the student of foreign trade. They have been published in the Review of Economic Statistics as follows: Bullock, Williams and Tucker, "The Balance of Trade of the United States (1789

While the net flow of capital was inward up to the very eve of the war, American investors had large and growing holdings abroad, chiefly in Canada and Mexico. Paish put our foreign investments in 1909 at a billion and a half, and Charles F. Speare in the same year estimated them at something between a billion and three quarters and two billions, of which he credited a third to Mexico and a quarter to Canada. American capital, he declared, had been flowing into Mexico during the preceding ten years at the rate of from fifty to seventy-five millions a year.' The revolutionary disturbances for a time. checked this flow of money southward, but our investment in Canadian lands, forests, mines and industrial enterprises rose rapidly during the years just preceding the war. Our Middle Western farmers alone, emigrating to the prairie provinces, took with them large sums for land purchase, while American capitalists invested heavily in farm and timber lands, and American factories opened Canadian branches. At the outbreak of the war American investments in Canada were placed at $600,000,000 or more.2

These capital exports helped other countries to buy goods from us on credit, and thus swelled the favorable trade balance of the years preceding the war; yet we were not, during this time, actually passing from a debtor to a creditor position. Despite our enormous wealth, our highly developed industry, and our growing financial strength, we were still a financially young country at the outbreak of the war. Investment opportunities here, by comparison with those in other countries, were still so attractive that the net flow of capital was inward. Even by sending out goods and specie to an excess value of half a billion yearly we did not succeed in meeting the annual charges against us on other than merchandise account.

1919)," July, 1919; Vanderlip and Williams, "The Future of Our Foreign Trade (1919)," April, 1920; Williams, "The Balance of International Payments of the United States for the Year 1920" (containing revised figures for the war years), June, 1921; "Special Letter" of December 10, 1921. I have made use of these studies throughout.

1 North American Review, July, 1909.

Skelton, The Canadian Dominion, p. 237.

The war changed this situation primarily by leading Americans to sell abroad, during the war period, goods to a value of eighteen billion dollars in excess of their foreign purchases during the same time. This was made possible by unprecedented credit operations on both public and private account. The detailed figures of export and import values, expressed in millions of dollars, are as follows:

Williams points out that the export figures of 1920 are probably two hundred millions too large, owing to the abrupt drop of values during that year, which led to the actual sale of some goods at prices below those stated in the manifests. On the other hand, Thomas W. Lamont calls attention to the fact that "during the period of our participation in the war our government exported great quantities of goods not only for its own. use but also for sale to its Allies. These government exports are unrecorded." It is to be observed, however, that the Treasury on November 15, 1921, held obligations of foreign governments received from the Departments of War and the

'The sum of $76,000,000 should be added for 1914-18, $91,000,000 for 1919, and $103,000,000 for 1920, to cover exports of Federal Reserve notes and other currency during those years.

Adding exports of Federal Reserve notes, the total becomes $18,352,000,000.

Annals of the American Academy of Political and Social Science, vol. 87, p. 100 (January, 1920).