The Wealth of Nations · Chapter
VI: Of Treaties of Commerce explained
Smith critiques treaties of commerce that grant monopolistic privileges to foreign nations, arguing they benefit the favored country's merchants at the expense of the favoring country's consumers and overall national wealth.
What happens
Smith critiques treaties of commerce that grant monopolistic privileges to foreign nations, arguing they benefit the favored country's merchants at the expense of the favoring country's consumers and overall national wealth. He examines the Methuen Treaty between England and Portugal, debunking the mercantilist notion that trade balances in gold and silver are advantageous, and contends that such treaties diminish the exchangeable value of annual produce. Smith also discusses the role of gold and silver in facilitating roundabout foreign trade, the inefficiencies of coinage, and the futility of seeking trade surpluses.
Themes in this chapter
Free Trade and Market Competition
Smith argues that treaties granting monopolies to foreign nations reduce competition, raise prices for consumers, and diminish national wealth compared to free trade.
Self-Interest and the Invisible Hand
The merchants of the favored country act in self-interest to exploit their monopoly, but Smith implies that such narrow interests do not align with the general prosperity.
Wealth and Money
Smith examines the role of gold and silver in foreign trade, debunking the mercantilist focus on trade balances and emphasizing their function as convenient instruments of commerce.
Role of Government
Critique of government-negotiated treaties that create monopolies and distort trade, as well as the mint's coinage policies and seignorage.
Characters to notice
- Adam Smith
Author and primary commentator, analyzing the Methuen Treaty and critiquing mercantilist trade policies.
- Great Britain
The favoring country in the Methuen Treaty, bound to admit Portuguese wines at reduced duties, and subject to Smith's analysis of trade disadvantages.
- The Colonies
Referenced indirectly as part of the broader trade system; Smith discusses the Portugal trade's role in supplying gold for British commerce.
- The Portuguese
The favored nation in the Methuen Treaty, gaining a monopoly for their wines in the British market.
- The French
Mentioned as a competing wine producer whose duties are used as a benchmark in the Methuen Treaty.
- The Spaniards
Referenced in the context of the late war, where Spain and France pressured Portugal to exclude British ships.
Key passages
“When a nation binds itself by treaty either to permit the entry of certain goods from one foreign country which it prohibits from all others, or to exempt the goods of one country from duties to which it subjects those of all others, the country, or at least the merchants and manufacturers of the country, whose commerce is so favoured, must necessarily derive great advantage from the treaty.”
A treaty that grants exclusive trade privileges to one foreign nation benefits that nation's merchants by giving them a protected market.
Smith introduces the core argument that such treaties create monopolies for the favored country.
“Such treaties, however, though they may be advantageous to the merchants and manufacturers of the favoured, are necessarily disadvantageous to those of the favouring country.”
While the favored nation gains, the country granting the privilege suffers because its consumers pay higher prices and its own producers face unfair competition.
Smith highlights the zero-sum nature of monopolistic trade agreements.
“It was upon this silly notion, however, that England could not subsist without the Portugal trade, that, towards the end of the late war, France and Spain, without pretending either offence or provocation, required the king of Portugal to exclude all British ships from his ports, and for the security of this exclusion, to receive into them French or Spanish garrisons.”
The mistaken belief that England depended on the Portugal trade led France and Spain to demand Portugal ban British ships, a move that would have caused only temporary inconvenience.
Smith dismisses the mercantilist fear of losing the Portugal trade as exaggerated.
“The great annual importation of gold and silver is neither for the purpose of plate nor of coin, but of foreign trade.”
Most gold and silver imports are not used for jewelry or currency but to facilitate international commerce.
Smith explains the practical role of precious metals in roundabout trade.
