IV. Trade Between More Than two Countries

The older writers rarely departed from the simplifying assumption that only two countries participated in foreign trade, and there are therefore only a few instances to be examined of discussion of the problems of international trade in terms of more than two countries.

William Ellis, in an attempt to meet the argument current in his time that England would suffer injury if competition with her staple export industries should develop abroad, introduced for the first time a third country into arithmetical illustrations of the type used by Ricardo and James Mill in their exposition of the doctrine of comparative costs. He began with England and France engaged in trade, with England having a comparative advantage in cottons and France in silk. He then showed that the entrance into the trade of a third country, Brazil, with a comparative advantage in sugar, did not result in a loss to England. This, of course, did not meet the issue, and to have made his point he would have had to show that England could not lose from the entrance of Brazil into trade even if Brazil's comparative advantage was in the same commodity, cotton, as England's.

In his only reference to a third country, J. S. Mill first considered the effect on the terms of trade of England with Germany of the entrance into trade of a third country exporting the same commodity as Germany, namely, linen, and concluded that in consequence England would get her linen more cheaply in terms of English cloth. He then assumed that the third country produces neither linen nor any other commodity in demand in England, but has a demand for English cloth, and produces commodities which are in demand in Germany, and concluded that here also England's terms of trade with Germany would improve as the result of the entrance of the third country into trade, as Germany would have to induce England to take more of her linen in order to obtain the means of paying for her imports from the third country. This seems to me to be correct reasoning as far as it goes. But there are other possibilities, unfavorable for England, which Mill left unmentioned, as, for instance, if this third country had no demand for English cloth but was herself a potential exporter of cloth and importer of German linen.

Torrens, in The Budget, had argued that if Cuba imposed a duty on English cloth, the restoration of equilibrium in the trade balance of the two countries would require a relative fall in the price of English cloth as compared to Cuban sugar. Merivale replied that if an alternative source for sugar was available to England, although at a somewhat higher price than that at which Cuban sugar was available before the imposition of the Cuban duty on cloth, the rise in the price of Cuban sugar and the fall in the price of English cloth “would soon bring into play the competition of the next cheapest country producing the same commodities as Cuba.” While the Cuban duty, therefore, would affect adversely the terms of trade of England, the injury to her would be much less than if Cuba were the only source of sugar. Torrens, in reply, criticized some of the details of Merivale's argument, but conceded that on Merivale's assumption that sugar could be obtained from other sources at a price not much higher than the Cuban price prior to the imposition of the Cuban duty on English cloth, the terms of trade would not shift seriously against England.

Cairnes claimed that, while if there were only two countries with wide differences in their comparative costs of producing the staple articles of trade there would be a very considerable range within which the terms of trade could be determined under the influence of comparative costs, if there were more countries competition from one or more of these countries would prevent the terms of trade from settling at either of the limiting rates. This is valid as a probability, but Cairnes proceeded to too rigorous a conclusion:

... it is not the difference in the comparative costs of production in each pair of trading countries that fixes the limits to the possible variations of international values under the influence of reciprocal demand, but, among all countries mutually accessible for commercial intercourse, the difference of comparative costs, as it exists in the particular countries in which that difference is least. The limits of variation are thus set by the minimum, not by the maximum, difference in comparative cost among the various exchanging and competing countries.

There is no such necessity. Assume the following situation:

If at the ratio of three of N for one of M country III is willing to supply all of commodity N which all three countries want, then this will be the effective rate of exchange of the two commodities, and trade between country I and country III will take place on terms corresponding to the “maximum difference

in comparative cost among the various exchanging and competing countries.”

Triangular (or multiangular) trade has been examined by Graham, Taussig, von Mering, and earlier writers, by means of arithmetical examples of one type or another. Edgeworth's logarithmic illustration, modified so as to apply to more than two countries, seems to me, however, to be better suited to the purpose than arithmetical illustrations.

Chart IX is constructed on the same principles as chart VIII, except that four countries are included, instead of only two. What commodities each country will export and import and on what terms will be determined by the comparative costs in conjunction with the comparative wage rates, and the latter in turn will be determined, in part, by the reciprocal demands. For chart IX (a), the following situation will prevail under equilibrium conditions:

In addition, country I may either export or import or not trade in commodities B and E, and country IV may either import or export or not trade in commodity E, these commodities being on the margin of trade for those countries. The ratios in which the commodities will exchange for each other will, of course, be the reciprocals of their price ratios in a common currency. Their prices will be the antilogs of the logarithms of lowest money costs represented by the vertical distances from O1 on a right line, as indicated below:

In IX, (b) all the real costs are the same as in (a), but because the reciprocal demands are different in (b) from what they are in (a), money costs, prices, and the conditions of trade are also different, as compared to (a). Under equilibrium conditions, the following situation will prevail in (b):

In addition, country II may either import, export, or not trade in commodity A, this commodity being on the margin of trade for that country. The prices of the commodities will be as follows, measured as before by the antilogs of the indicated vertical distances:

For country I, the change in the demand situation from (a) to (b) improves its terms of trade with the outside world, i.e., enables it to get B,C,D, and E in greater quantities per unit of its export A, or per unit of real cost, than before.