Front Page Titles (by Subject) XI. Types of Disturbance in International Equilibrium - Studies in the Theory of International Trade
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XI. Types of Disturbance in International Equilibrium - Jacob Viner, Studies in the Theory of International Trade 
Studies in the Theory of International Trade (New York: Harper and Brothers, 1965).
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XI. Types of Disturbance in International Equilibrium
In the examination of the probable effects on the terms of trade of a lasting disturbance of a preexistent international equilibrium, there is one basis of distinction between types of disturbances which calls for special emphasis. Disturbances are to be distinguished according as they originate in a relative change in the amounts, measured in units of constant purchasing power over native goods, available for expenditure in the two areas, or as they originate in a relative change in the demands of the two countries for each other's products in terms of their own products resulting from changes in taste or in conditions of production, or from changes in tariffs, subsidies, internal taxes, or transportation costs.1 The analysis presented above of the effects on the terms of trade of reparations payments is applicable without serious modification to all lasting disturbances of the first class, i.e., involving an initial relative shift in the amounts available for expenditure, whether this shift is due to loans, tribute, or subsidy, but is not applicable to disturbances of the second class, where, however, analysis in terms of reciprocal demand curves is appropriate in most cases.
Whereas in the first class of disturbance a relative change in the amounts available for expenditure in the two countries is the source of the disturbance and a relative change in the demands of the two countries for each other's products is the result of the disturbance, in the second class of disturbance a relative change in the demands is the original cause of the disturbance and a relative change in the amounts available for expenditure is part of the process of adjustment to the disturbance. The case of a new revenue import duty, levied by one of the countries, may be taken as sufficiently illustrative of the effects of disturbances of the second class on the terms of trade. Let us suppose only two countries, only two commodities, no tariffs, no transportation costs, and an even balance of payments between them. One of the countries, England, now imposes a duty on imports of the German commodity. Before the duty the two commodities exchanged for each other at the same rate in both countries. After the duty the German commodity will rise in price to the English consumer relative to the English commodity. Let us assume that this relative rise is at first equal to the amount of the duty. The English will therefore buy smaller physical quantities than before of the German commodity and larger physical quantities than before of the English commodity. Suppose that the reduction in the volume of their sales to England will tend to cause Germans to reduce their total expenditures to the same amount, and that part of this reduction will be applied to German commodities. The willingness to buy German goods at the prevailing price (in England plus duty) will therefore decline in both countries; the willingness to buy English goods will increase in England, and decrease in Germany; with the increase in the former (corresponding to the total decrease in English purchases of German goods and therefore, by assumption, to the total decrease in German purchases of German and English goods combined) exceeding the decrease in the latter country.
Two consequences will follow: (1) Germany will have an adverse balance of payments with England, and specie will move from Germany to England; (2) the price of the German commodity will fall in both countries relative to the English, so that in England it will, without duty, be lower than it was before the duty was imposed, and, including duty, will exceed the pre-duty price by less than the amount of the duty. In other words, the commodity terms of trade will have moved against Germany, with an international transfer of specie as part of the process whereby this comes about. The effect of the duty on the terms of
trade is illustrated in chart VII, an application in a slightly modified2 form of Marshall's foreign trade curves.
The quantity of the English commodity is measured from o on the ox axis, and the relative price of the English commodity, in terms of number of units of the German commodity for one unit of the English commodity, is measured from o on the oy axis. The curve ae represents the quantities of the English commodity which before the duty England would be willing to export at the indicated rates of exchange of the English for the German commodity, and the curve bg represents the quantities of the English commodity which Germany would be willing to import at the indicated rates of exchange of the English for the German commodity. Equilibrium will be established at the terms of trade of mn or ot units of the German commodity for one unit of the English commodity.
If now England should levy a duty of 40 per cent ad valorem on imports of the German commodity, payable by the importer and used by the government to remit other taxes, the English export supply curve adjusted to the duty will be a1e1, with a1e1 uniformly 40 per cent higher than ae with reference to the ox axis. The new equilibrium rate of exchange of English commodities for German will in the English market (i.e., after payment of duty) be m1k, or ol, units of German goods for one unit of English goods. The new terms of trade, or the rate at which Germany will be able to exchange its commodity for the English commodity, will be m1n1, or o1t1, units of the German commodity for one unit of the English commodity, which will also correspond to the relative prices of the two commodities within Germany. The terms of trade will thus be turned against Germany by the English import duty.
It can similarly be shown that an English protective duty, a German export bounty, higher German or English internal taxes on German than on English goods, a shift in taste in either country in favor of English goods, or a relative reduction in the cost of producing the German commodity, will in like manner turn the terms of trade against Germany, whereas a German revenue or protective duty, an English export bounty, lower German or English internal taxes on German than on English goods, a shift in taste in either country in favor of German goods, or a relative reduction in the cost of producing the English commodity, will turn the terms of trade in favor of Germany.
An endless variety of further distinctions between types of disturbances can of course be drawn. Tributes and loans, for instance, are to be distinguished from each other by the fact that, since the former are as a rule involuntary and the latter voluntary, the problem of adjustment in the “paying” country is likely to be more serious in the former than in the latter case. Loans, moreover, call almost immediately for interest payments and eventually for amortization payments in the opposite direction from the loans, whereas this is not true of tributes. Loans are to be distinguished according to whether they are made out of income or out of capital, and according to whether the proceeds are used in the borrowing country for immediate consumption or for investment, since the nature of the source and of the mode of use of the loan will affect the manner in which adjustment is made to the change in the amount of funds available for expenditure, and will affect also the relative availability of the different classes of commodities toward which the expenditures are directed. In actual experience the initial disturbances may come in various combinations, or may originate at home or abroad, or simultaneously in both, and, depending on the nature of the original disturbance and perhaps on other circumstances, what at one time operates as the source of the disturbance and gives rise to the need for adjustment may at other times be the equilibrating factor, with corresponding changes in the time-sequence of phenomena. Thus price changes, capital movements, changes in demand, for example, may at one time be disturbing factors, at other times equilibrating ones, and except when there are drastic disturbances whose origin is fairly obviously to be associated with contemporary events external to the mechanism of international trade itself, it will ordinarily be fruitless to try to distinguish equilibrating from adjusting factors. Some writers have attempted to generalize, however, as to the “disturbing” or “equalizing” character of specific elements in international balances. Thus Keynes, for instance, has maintained that historically the international movement of long-term capital has adjusted itself to the trade balance rather than the trade balance to capital movements,3 whereas Taussig4 has supported the opposite, and traditional, view. There is no apparent a priori reason why the dependence should not be as much in one direction as the other, and the question of historical fact can be settled only, if at all, by comprehensive historical investigation. It is possible, however, to set forth theoretically the types of circumstances which would tend to make the one or the other the more probable direction, and to find striking historical illustrations in support of such analysis. It seems clear to me, for instance, that in the case of Canada before the war the fluctuations in the trade balance were much more the effect than the cause of the fluctuations in the long-term borrowings abroad, whereas in the case of New Zealand the fluctuations in her balance of indebtedness since the war seem to be clearly the result rather than the cause of the fluctuations in her trade balance. In New Zealand a marked degree of dependence of the national income on the state of the crops and the world-market prices of a few export commodities, with sharp year-to-year fluctuations in the crops and in prices, makes it necessary to choose between highly unstable expenditures on consumption or domestic investment, on the one hand, and substantial fluctuations in the net external indebtedness of the country, on the other, and the choice seems to be predominantly in favor of the latter. Examination of such data as are readily available strongly confirms, however, the orthodox doctrine that, at times when “fear” movements of capital are not important, short-term capital movements are much more likely than long-term capital movements to be “equilibrating,” and that major long-term capital movements have, as Taussig maintains, mainly been “disturbing” rather than “equilibrating” in nature.
The foregoing discussion, it should be repeated, has dealt solely with the long-run effects of a lasting variation in one of the elements of an original equilibrium on the terms of trade. It should be noted also that changes in the terms of trade have been treated as purely objective phenomena, without reference to the differences in hedonic significance which may be attached to them according to the types of disturbance from which they result.
Cf. T. O. Yntema, A mathematical reformulation of the general theory of international trade, 1932, chap. v, especially pp. 61-62, 71-72.
Cf. infra, pp. 541-42.
“The German transfer problem,” Economic Journal, XXXIX (1929), 6.
Cf. International trade, 1927, pp. 312-13. Cf. also Carl Iversen, Aspects of the theory of international capital movements, 1935, pp. 181 ff.