Adam Smith on Portuguese wine and English cloth

Abstract

Half a century before David Ricardo’s famous numerical example of the exchange of Portuguese wine for English cloth under the Methuen Treaty as illustrating trade creation and comparative advantage, Adam Smith denounced the Methuen Treaty as an instance of trade diversion, displacing British imports of French wines with higher cost, lower quality Portuguese wines. Relying on his argument that the division of labour is limited by the extent of the market, Smith insisted that a treaty of commerce with France would be more beneficial, and supported Eden’s Treaty (1786). Smith also rejected the argument of Cantillon and mercantilists that the exchange of English cloth for Portuguese wine benefitted Britain by bringing in gold and silver, arguing that an excess demand for precious metals in Britain would by itself cause an inflow of gold and silver. Smith’s critique of the Methuen Treaty and his posing of the question of which commercial treaties would be trade-creating rather than trade-diverting have been largely overlooked.

KEYWORDS:

• Adam Smith
• Methuen Treaty
• Portuguese wine and English cloth

JEL CODES:

• B12
• F10
• F13

Notes

1 I am grateful to Harald Hagemann, Heinz Kurz and other participants in the ESHET conference, and to the editors and referees, for helpful comments.

2 Ronald Findlay (1984, p. 186) observes that “The Ricardo of pure trade theory is a pale shadow of the real one. The very neatness and elegant simplicity of the chapter 7 analysis seems to have diverted attention from the more complex, but also in my opinion very rich and deep ideas contained in the Essay [on Profits], and also, for that matter, in the rest of chapter 7.” The celebrated numerical example occupies only a seventh of Ricardo’s chapter 7.

3 Excepting works written in Portugal: while Almodovar and Cardoso, in their History of Portuguese Economic Thought (1998, p. 34), give only a single sentence to Smith’s belief that the treaty was “evidently advantageous to Portugal and disadvantageous to Great Britain,” without indicating why he thought so, they class Smith’s comments on the treaty with Ricardo’s as “well-known” – that is, well known in Portuguese economic thought. See also José Luis Cardoso (forthcoming). Pedro Lains (2017), writing on Portugal’s wine globalization waves, mentions Ricardo but not Smith. The first Portuguese translations of Ricardo’s Principles were surprisingly late: the first two chapters, on value and rent, in 1938–39 and the entire book in 1975, although it was read in Portugal in a French translation much earlier (see Cardoso 2014).

4 McCulloch (1845, p. 140) reported that “it is stated in ‘British Merchant’ [King 1721], a work of great authority at the time, that a statue ought to be erected to Mr. Methuen in every considerable town in the empire!” The British Merchant was published in weekly numbers “written by some of the leading merchants” in opposition to a treaty of commerce and navigation at the end of the War of the Spanish Succession in 1713 that would have negated the Methuen Treaty by granting France most-favored nation status (the bill to give effect to the treaty was rejected by the House of Commons by the narrow margin of 194 to 185), “but that papers being subsequently collected and published by Mr. Charles King, his name appears singly on the title-page” (McCulloch 1845, p. 142). The case for the treaty was argued against The British Merchant by Daniel Defoe “though with little talent and in a subdued tone” according to McCulloch.

5 V. Magalhães Godinho (1970, p. 512) noted that an influential protectionist tract, the Discurso sobre a Introdução das Artes neste Reino in 1675, was written by Duarte Ribeiro de Macedo, a Portuguese ambassador to France “whose position had exposed him to the thinking of Colbert.” Magalhães Godinho (1970, pp. 519, 523) also reported, as two unrelated occurrences, “The general economic recovery manifest after 1692” and that “after 1692, the industrialization policy as a whole was abandoned.”

6 See Smith to Eden, 3 January 1780 and 15 December 1783, in Smith (1987, pp. 244–46 and 271–72), Dupont (1788), Dupont to Smith, 17 June 1788, in Smith (1987, pp. 311–13); McCulloch (1845, pp. 144–45) on tracts by Eden and by Dupont defending the treaty, and by their critics in both countries objecting that the treaty favored the other country; Lodge (1896, p. 748), Fay (1950, pp. 17, 468–69).

7 Gomes (2003, p. 80) quotes Friedrich List’s criticism of this remark by Smith on the grounds that British products undermined Portugal’s textile industry (see List 1841–44, pp. 62–65), and also quotes Sideri (1970) on the resulting diversion of Brazilian gold to Britain. These are hardly telling criticisms: the whole point of specialization and exchange is the shift of resources out of one sector (Portuguese textile manufacturing) into another, while Smith was well aware of the inflow of Brazilian gold into Britain, arguing that the British demand for gold would be satisfied under free trade without any such contrivance as the Methuen Treaty: an excess demand for gold in Britain would lead the British to increase their holdings of gold by spending less than their income on other goods, including imported and exportable goods. The claim by List (1841–44, p. 41) that “By the operation of this treaty the Dutch and the Germans were entirely excluded from the important trade with Portugal and her colonies” is not supported by the text of the treaty, which in no way restricted, or mentioned, the terms on which Portugal could admit non-British woollens – as Smith had remarked. List (1841–44, pp. 256, 361) criticized Ricardo on rent, but did not mention Ricardo’s writings on foreign trade.