CAPITAL INVESTMENTS AND TRADE EMPIRE SUMMARY Introductory. Effects of international lending and borrowing on imports and exports, 769.-I. British India. The debit and credit items, 770. Tabular statements, 772. — Foreign capital investments and interest charges, 775. — Obvious gain from productive investments, 779. II. Canada's heavy borrowings, 780.- Halt in 1914, 783.— Exports and imports, 785." Invisible" items, 786. - Approximate balance sheet, 790. — Imports from United States, 791. - EVIDENCE abounds that the dictum of Sir Robert Giffen that "the 'balance of trade' and 'the excess of imports over exports' are pitfalls for the amateur and unwary " has lost little of its pertinency. Recognizing alike the plausibility of the "favorable balance" doctrine and its widespread popular acceptance, the writer feels that it may be of interest to attempt an analysis of the trade balances of certain countries. In this study, restricted to a survey of conditions within the British Empire, the endeavor will be made to apply deductively to a few individual countries the generally accepted propositions relating to the connection between capital investments and foreign trade conditions. In the interest of clearness let us summarize these principles.1 Generally speaking, those countries of the world. which have an excess of merchandise imports over 1 A comprehensive statement on this question is contained in The Trade Balance of the United States, by Sir George Paish (in the U. S. National Monetary Commission Publications). merchandise exports are the capital lending countries, whereas those whose exports exceed imports are the borrowing countries. This is so, because the lending country must secure payment, in the guise of imports, not only for its merchandise exports but also for the interest upon its capital invested abroad in earlier years. Similarly, if we exclude other factors from consideration, the capital-borrowing country must export more goods than it imports in order to offset the merchandise imported as well as to meet the interest charges upon the capital which it has previously borrowed. True, during the early stages of capital investment the lending country will normally show an excess of exports. Were these capital investments to extend over one year only, the excess of merchandise exports of the lending country during the period in question would approximately measure the amount of the capital loaned abroad. As time elapses, however, the total capital invested in other countries increases, altho at a diminishing percentage rate, while at the same time the annual interest charges owed to the creditor nation show a more than corresponding percentage increase. Eventually the time will arrive when the annual payments which the lending country receives as interest on its foreign investments will exceed the new and additional capital which it may lend each year. The same reasoning may be employed to show that the borrowing country, during the early stages, will normally import a larger amount of merchandise than will be exported, and that here too the passing of time brings in its wake a change in the trade balance. Ultimately the annual interest payments of the borrowing country on account of capital previously obtained will surpass in amount the new capital which it borrows in each year. Thus in the end, its merchandise exports will overtake and then exceed its imports. It is obvious on reflection that any nation may in time change from the position of a "net " borrower to that of a "net " lender. The United States will serve to illustrate the possible transition. As is well known, its regular merchandise import excess down to 1873 was attributable chiefly to its heavy annual borrowings. The annual export balances since that year are largely explained as the result of heavy annual payments of interest and dividends on earlier borrowings. In recent years, however, the United States has shown signs of a new possible turn of the balance resulting from her increasing capital investments in foreign countries.1 It is quite possible that in a not distant future the United States may find herself a "net " lender and that her merchandise balance will reflect this, both immediately and at a later date when the volume of her "net interest and dividend receipts will reach and pass the volume of her annual new "net" lendings. I. BRITISH INDIA In applying these principles to the foreign trade conditions of various countries within the British Empire, India, because of her commercial importance, will be considered first. The various items which must be taken into account in making up India's balance of international debits and credits are as follows: 1 It is estimated by Professor W. Z. Ripley (N. Y. Journal of Commerce, December 6, 1911) that during the ten years ending in 1906, approximately $250,000,000 of the securities of nine American railroads were returned to this country from Europe. In 1899 a large part of the 4 per cent bond issues of certain Swiss cities was subscribed by two American insurance companies. The diversion of considerable American capital into the construction of London tube railways, the flotation of Japanese and Chinese loans in this country, and the establishment of American branch banks in South America bear witness to this growing tendency of American capital to seek investment abroad. In 1911 it was stated in the New York Journal of Commerce that American investments in Mexico aggregated about $700,000,000. In the opinion of Sir Edmund Walker, unofficially stated, the indebtedness of Canada to the United States amounted in 1914 to over $500,000,000. 1. Merchandise imports and exports. To these the position of first importance must naturally be given. 2. Payments to foreign shipping interests. As is well known, India is forced to meet heavy charges on account of the transportation of her goods in foreign bottoms, since there are practically no India-owned steamships. Inasmuch, however, as these charges are for the most part included in the declared figures for imports, it is to that extent unnecessary to make any further allowance for them. After making reasonable adjustments between shipping debits against India and certain credits in favor of that country on account of port and pilotage dues, cost of coal and stores purchased in India, wages of the crew spent in India, etc., it is probable that the net result is a minor debit against India of not less than £33,000, over and above the amount for freight actually included in the values recorded for imports.1 3. Investments of foreign capital in India and the payment of interest charges by India. 4. Other debits against India include various miscellaneous charges for the use of foreign capital or credit, by way of commission, premiums of insurance, remittances to England on private account, as for example on behalf of Indians residing in England. 5. On the other side will occur a corresponding credit to India on account of income remittances from England (or elsewhere abroad) to persons resident in India, such as British officers in enjoyment of independent incomes. 6. Private remittances of securities. The effect of this item is similar to that of number three. 7. Private imports and exports of the precious metals. In striking the balance of accounts these should be 1 Report for 1913-14 of Controller of Currency for India, p. 55. treated as imports and exports of other commodities on private account. 8. The transactions of the Indian government, whether in the form of loans, remittances of interest, imports and exports of the precious metals or of other commodities. In somewhat condensed form the following table presents the chief items of the foreign trade (i. e., the "visible" exports and imports) of India for a series of years.1 Private Merchandise... £107.9 £118.3 £125.3 £139.9 £152.0 After taking into consideration all debit and credit transactions (the "invisible" exports and imports as well as the "visible") there is customarily a small net balance in favor of India. Occasionally, however, an adverse balance is confronted. For example, during the fiscal year 1907-08 there resulted a net debit against India. It was attributed to a famine in India, a credit crisis in the United States, and other unfavorable con 1 Statement of Moral and Material Progress and Condition of India for 1911-12, p. 286. * Including Government Stores: a very small item, in no year exceeding £100,000. |