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 vi Preface

(trade and financial) problems facing the United States and the world today and so has the
discussion in Chapter 21 (Section 21.6), which examines how they can be resolved.
The rapid globalization of the world economy is providing major benefits to most
countries, but it is also presenting many challenges to poor countries that are unable to take
advantage of globalization, as well as to the United States and other advanced countries,
which face increasing competition from some emerging markets, especially China. These
topics are discussed in several new sections and case studies in the trade and finance part
of the text.
The dollar–euro exchange rate is much in the news these days as are the huge and
unsustainable trade deficits of the United States. The relationship between U.S. trade defi-
cits, trade protectionism, and misaligned exchange rates is examined, both theoretically and
empirically, and in all of its ramifications, in several trade and finance sections and case
studies in this new edition of the text.
Besides its effect on international trade and international competitiveness, the continu-
ing globalization of the world economy and liberalization of international capital markets
have further eroded governments’ control over national economic and financial matters.
Exchange rates exhibit great volatility and large misalignments, which interfere with the
flow of international trade and investments and the comparative advantage of nations. At
the same time, international macroeconomic policy coordination has not progressed suffi-
ciently to deal adequately with the potential problems and challenges that increased inter-
dependence in world financial markets created.
The 12th edition of the text also presents an in‐depth analysis of the dangerous struc-
tural imbalances in the world economy and provides an evolution of the policy options
available to deal with them. The major imbalances in the world economy today are the huge
trade and budget (twin) deficits of the United States, the slow growth and high unemploy-
ment in Europe, the decade‐long stagnation in Japan, the serious competitive challenge for
both advanced and developing countries provided by the competition from China, the dan-
ger of financial and economic crises in advanced and emerging market economies, world
poverty, resource scarcity, and environmental degradation. All of these topics are addressed
in this edition of the text.
There are 126 case studies in the text. Many are new and the others have been thor-
oughly revised.
The extended annotated Selected Bibliography for each chapter (on the WEB) has
been thoroughly updated and extended, and it represents a major resource for further study
and research on various topics.
The INTERNet section for each chapter (also on the Web) has been updated and
expanded and gives the most important Internet site addresses or links to data sources,
information, and analyses for the topics presented in each chapter to show the student how
to access and use the wealth of information available on the Internet.
The Companion Website for the text has also been thoroughly updated and expanded,
and it presents for each chapter additional examples, cases, and theoretical points, as well
as questions and problems that can be answered or solved using the Internet.
New, extended, and revised sections and case studies in the trade theory and policy
parts of the text include benefits and challenges of globalization before and after the recent
global financial crisis, the gravity model, the changing pattern of comparative advantage,
variety gains from international trade, EU–U.S. trade disputes and protectionism, the per-
vasiveness of nontariff trade barriers, strategic trade and industrial policies, the emergence
of new economic giants, job losses in high U.S. import‐competing industries, international

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 Preface vii

trade and deindustrialization of the United States and other advanced countries, interna-
tional trade and U.S. wage inequalities, benefits and costs of NAFTA, international trade
and environmental sustainability, globalization and world poverty, trade and growth in
developing countries, the collapse of the Doha Round and the several failed attempts to
revive it, and the debate over U.S. immigration policy.
New sections and case studies in international finance include size, currency, and geo-
graphical distribution of the foreign exchange market; the carry trade; fundamental forces
and “news” in exchange rate forecasting; the exploding U.S. trade deficit with China; the
euro/dollar exchange rate defies forecasting; the Balassa–Samuelson effect in transition
economies; structural imbalances and exchange rate misalignments; the effective exchange
rate of the dollar and U.S. current account deficits; exchange rate pass‐through to import
prices; monetary policies across the Atlantic; EU’s inadequate restructuring and slow
growth; petroleum prices and growth; inflation targeting and exchange rates; the global
financial crisis and the Great Recession; slow recovery and growth after the Great
Recession; the Eurozone crisis and the future of the euro; exchange rate arrangements of
IMF members; and reforms of the international monetary system.
More international trade and finance data are included throughout the text.

Audience and Level

The text presents all of the principles and theories essential for a thorough understanding
of international economics. It does so on an intuitive level in the text itself and more rigor-
ously in the appendices at the end of most chapters. In addition, partial equilibrium analysis
is presented before the more difficult general equilibrium analysis (which is optional).
Thus, the book is designed for flexibility. It also overcomes the shortcomings of other
international economics texts in which the level of analysis is either too complicated or
too simplistic.

Organization of the Book

The book is organized into four parts. Part One (Chapters 2–7) deals with trade theory
(i.e., the basis and the gains from trade). Part Two (Chapters 8–12) deals with trade policy
(i.e., obstructions to the flow of trade). Part Three (Chapter 13–15) deals with the measure-
ment of a nation’s balance of payments, foreign exchange markets, and exchange rate deter-
mination. Part Four (Chapters 16–21) examines open‐economy macroeconomics or the
macro relationships between the domestic economy and the rest of the world, as well as the
operation of the present international monetary system.
In the typical one‐semester undergraduate course in international economics, instruc-
tors may wish to cover the 14 core chapters (1–6, 8, 13–18, 21) as well as the few other
sections in other chapters and exclude the appendices. Undergraduate courses in interna-
tional trade could cover Chapters 1–12, 21 while in undergraduate courses in international
finance could cover Chapters 1, 13–21. The many examples and real‐world case studies
presented also makes the text very suitable for international economicvs courses in busi-
ness programs. In first‐year graduate courses in international economics and business,
instructors may want to cover the appendices also and assign readings from the extensive
annotated bibliography at the end of each chapter (on the Web).

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 viii Preface

For the Student

• The same example is utilized in all the chapters dealing with the same basic concept.
This feature is unique to this text. For example, the same graphical and numerical model
is used in every chapter from Chapters 2 through 11 (the chapters that deal with trade
theory and policy). This greatly reduces the real burden on the student who does not have
to start afresh with a new example each time. It also shows more clearly the relationship
among the different topics examined.
• Actual numbers are used in the examples, and the graphs are presented on scales. This
makes the various concepts and theories presented more concrete, accessible, and perti-
nent to the student, and the graphs easier to read and understand.
• There are 126 case studies (from 4 to 9 per chapter). These real‐world case studies are
generally short and to the point and serve to reinforce understanding and highlight the
most important topics presented in the chapter.
• The sections of each chapter are numbered for easy reference. Longer sections are bro-
ken into two or more numbered subsections. All of the graphs and diagrams are carefully
explained in the text and then summarized briefly in the captions.
• The judicious use of color and shading enhances the readability of the text and aids
student understanding.
• Each chapter ends with the following teaching aids:

• Summary—A paragraph reviews each section of the text.

• Key Terms—Lists the important terms introduced in boldface type in the chapter.
A glossary of all these terms in is then provided at the end of the book.
• Questions for Review—Fourteen questions (two or more for each for each section in
the chapter).
• Problems—Fourteen to fifteen problems are provided for each chapter. These ask the
student to calculate a specific measure or explain a particular event. Brief answers to
selected problems (those marked by an asterisk) are provided at www.wiley.com/
college/salvatore for feedback.
• Appendices—These develop in a more rigorous, but careful and clear fashion, mate-
rial that is presented on an intuitive level in the chapter.
• Selected Bibliography—The most important references are included along with spe-
cific notes indicating the topic they deal with (on the Web). A separate author’s index
is included at the end of the book.
• INTERNet—There is a section at the end of each chapter that provides Internet site
addresses or links to data sources, information, and analyses on the topics presented in
each chapter to show the student how to access and use the wealth of information
available on the Internet (on the Web).
• Accompanying the text, there are also:
• A Website—This presents for each chapter additional examples, cases, and theoretical
points and questions as well as problems that can be answered or solved using the
Internet. The Website is continuously updated to reflect important new developments in
the international economy as they unfold.

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 Preface ix

• An Online Study Guide prepared by Professor Arthur Raymond of Muhlenberg College

is available for students. This provides extensive review of key concepts, numerous addi-
tional illustrative examples, and practice problems and exercise sets.
• A Schaum Outline on the Theory and Problems of International Economics (4th edi-
tion, 1996), prepared by the author, can be purchased at a very low price in most book-
stores. This provides a problem‐solving approach to the topics presented in the traditional
way in this and other international economics texts.

For the Instructor

• An Instructor’s Manual prepared by the author is available which includes chapter
objectives and lecture suggestions, answers to the end‐of‐chapter problems, a set of
15–20 multiple‐choice questions with answers, and additional problems and essays for
each chapter.
• PowerPoint Presentations prepared by Professor Carol Stivender of the University of
North Carolina, Charlotte, provides brief outline notes of the chapter and also contains
all the figures and tables in the text. Available on the Instructor Companion Site.
• A Test Bank, prepared by Jeffrey Sarbaum of the University of North Carolina,
Greensboro, contains at least 25 multiple‐choice questions per chapter and is available
on the Instructor Companion Site. A computerized version for easy test preparation is
also available.

Acknowledgments
This text grew out of the undergraduate and graduate courses in international economics
that I have been teaching at Fordham University and other universities on four continents
during the past 30 years. I was very fortunate to have had many excellent students who,
with their questions and comments, contributed much to the clarity of exposition of
this text.
I have received much useful advice in writing this text by Professors Robert Baldwin
(University of Wisconsin), Jagdish Bhagwati (Columbia University), Alan Blinder
(Princeton University), William Branson (Princeton University), Phillip Cagan (Columbia
University), Richard Cooper (Harvard University), W. M. Corden (Johns Hopkins
University), Rudi Dornbusch (MIT), Martin Feldstein (Harvard University), Ronald
Findlay (Columbia University), Gerald Helleiner (University of Toronto), Lawrence Klein
(University of Pennsylvania), Ronald McKinnon (Stanford University), Robert Mundell
(Columbia University), Edmund Phelps (Columbia University), Jeffrey Sachs (Columbia
University), Amartya Sen (Harvard University), T. N. Srinivasan (Yale University), Robert
Stern (University of Michigan), Joseph Stiglitz (Columbia University), Lawrence Summers
(Harvard University), and John Taylor (Stanford University).
I greatly appreciate the feedback provided by reviewers of this and the previous edition
of the text:
Werner Baer (University of Illinois), Stefania Garetto (Boston University), Guoqiang
Li (University of Macao), Steven J. Matusz (Michigan State University), Leonie Stone
(State University of New York at Geneseo), and Elizabeth Wheaton (Southern Methodist
University).

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 x Preface

The following professors read through one or more of the previous 10 editions of the
text and made many valuable suggestions for improvement: Adelina Ardelean (Santa
Clara University), Sven Arndt (Claremont McKenna College), Taeho Bark (Georgetown
University), Harry Bowen (New York University), Joseph C. Brada (Arizona State
University), Janice Boucher Breur (University of South Carolina, Columbia), Francis
Casas (University of Toronto), Basanta Chaudhuri (Rutgers–State University of
New Jersey), Menzie Chinn (University of California—Santa Cruz), Nora Colton (Drew
University), Manjira Datta (Arizona State University), Denise Dimon (University of San
Diego), Martine Duchatelet (Barry University), Liam P. Ebril (Cornell University), Zaki
Eusufazai (Loyola Marymount University—Los Angeles), Phillip Fanchon (California
Polytechnic State University), Khosrow Fatemi (California Imperial Valley), Michele
Fratianni (Indiana University), Stephen Galub (Swarthmore College), Ira Gang (Rutgers
University), Darrin Gulla (University of Kentucky), Harish C. Gupta (University of
Nebraska), John W. Handy (Morehouse College), Roy J. Hensley (University of Miami),
David Hudgins (University of Oklahoma), Geoffrey A. Jehle (Vassar College),
Robert T. Jerome Jr (Madison University), Mitsuhiro Kaneda (Georgetown University),
Evert Kostner (Gothenburg University in Sweden), W. E. Kuhn (University of Nebraska–
Lincoln), Stanley Lawson (St. John’s University), Robert Lipsey (Queens College), Craig
MacPhee (University of Nebraska, Lincoln), Margaret Malixi (California State University
at Bakersfield), Daniel W. Marsh (University of Dallas), Jerome L. McElroy (Saint Mary’s
College of Indiana), Patrick O’Sullivan (State University of New York), Michael Plummer
(Brandeis University), David Raker (University of California at San Diego), Silke Reeves
(George Washington University), Rupert Rhodd (Florida Atlantic University), Donald
Richards (Indiana State University), Don J. Roussland (George Washington University),
Sunil Sapra (California State University, Los Angeles), Stefania Scandizzo (Texas A&M
University), Siamack Shojai (Marcy College), Michael Szenberg (Pace University), Wendy
Takacs (University of Maryland), C. Richard Torrisi (University of Hartford),
Joseph L. Tryon (Georgetown University), Hendrik van den Berg (University of Nebraska,
Lincoln), Jim Wang (Eureka College), Frank Weiss (Johns Hopkins University), and
Harold R. Williams (Kent State University).
Other professors and economists who provided valuable comments are Richard Baltz
(Millsaps College), Reza Barazesh (Director of Research at Equifax), Andrew Blair
(University of Pittsburgh), Luca Bonardi (partner at KPMG), Roger Bove (West Chester
University), Francis Colella (Simpson College), Evangelos Djinopolos (Fairleigh
Dickinson University), Ali Ebrahimi (Pace University), Dawn Elliott (Texas Christian
University), Holger Engberg (New York University), Marcel Fulop (Kean College),
George Georgiou (Towson State University), Reza Ghorashi (Stockton College), Fred
Glahe (University of Colorado), Henry Golstein (University of Oregon), Michael Halloran
(partner at Ernst & Young), Sunil Gulati (Columbia University), Francis J. Hilton (Loyola
of Baltimore), Syed Hussain (University of Wisconsin), William Kaempfer (University of
Colorado), Baybars Karacaovali (University of Hawaii), Demetrius Karantelis (Assumption
College), Samuel Katz (Georgetown University), James Kokoris (Northeastern Illinois
University), Kishore Kulkarni (Metropolitan State College in Denver), J. S. LaCascia
(Marshall University), Leroy Laney (Federal Reserve Bank of Dallas), Mary Lesser (Iona
College), Cho Kin Leung (William Patterson College), Richard Levich (New York
University), Farhad Mirhady (San Francisco State University), Kee‐Jim Ngiam (Carleton
University), Shreekant Palekar (University of Mexico), Anthony Pavlick (University of
Wisconsin), Ruppert Rhodd (Florida Atlantic University), T. S. Saini (Bloomsburg
University), Vedat Sayar (Brooklyn College), Gerald Scott (Florida Atlantic University),
Jeffrey R. Shafer (Managing Director of Salomon Smith Barney), Lezcek Stachow

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 Preface xi

(St. Anselm College), Stanislaw Wasowski (Georgetown University), Bernard Wolf (York
University in Canada), Behzad Yaghmaian (Ramapo College of New Jersey), Darrel
Young (University of Texas), Helen Youngelson (Portland State University), and Eden Yu
(University of Oklahoma).
Mary Burke, Fred Campano, Edward Dowling, Shushanik Hakobyan, Ralf Hepp,
Darryl McLeod, Erick Rengifo, James Santangelo, Kristine Kintanar, Henry Schwalbenberg,
Booi Themeli, and Greg Winczewski, my colleagues at Fordham University, read through
the entire manuscript and provided much useful advice. My graduate assistants, Daniel
Svogun, Katie Jajtner, and Joseph Mauro, provided much help with many aspects of
the project.
Finally, I would like to express my gratitude to Susan J. Elbe, the Publisher at Wiley;
Emily McGee, the Acquisition Editor; Charity Robey, the Executive Marketing Manager;
Gladys Soto, the Project Manager of Global Education; Courtney Luzzi, the Associate
Development Editor of Global Education; Marcus Van Harpen, the Editorial Assistant; and
the entire staff at Wiley for their kind and skillful assistance. Finally, I thank Angela Bates
and Josephine Cannariato (the department secretaries) for their efficiency and cheerful
disposition.

DOMINICK SALVATORE
Distinguished Professor of Economics
Fordham University
New York 10458
Tel. 718‐817‐4048
Fax 914‐337‐3355
e‐mail: salvatore@fordham.edu

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Salvatore_fpre.indd 12 11/16/2015 11:49:50 PM
 Brief Contents

1 Introduction 1

PA R T 1 I N T E R N AT I O N A L T R A D E T H EO RY
2 The Law of Comparative Advantage 29
3 The Standard Theory of International Trade 53
4 Demand and Supply, Offer Curves, and the Terms of Trade 79
5 Factor Endowments and the Heckscher–Ohlin Theory 101
6 Economies of Scale, Imperfect Competition, and International Trade 141
7 Economic Growth and International Trade 169

PA R T 2 I N T E R N AT I O N A L T R A D E P O L I C Y
8 Trade Restrictions: Tariffs 197
9 Nontariff Trade Barriers and the New Protectionism 227
10 Economic Integration: Customs Unions and Free Trade Areas 263
11 International Trade and Economic Development 287
12 International Resource Movements and Multinational Corporations 317

PA R T 3 T H E B A L A N C E O F PAYM E N T S , F O R E I G N E XC H A N G E
M A R K E T S , A N D E XC H A N G E R AT E S
13 Balance of Payments 345
14 Foreign Exchange Markets and Exchange Rates 365
15 Exchange Rate Determination 401

PA R T 4 O P E N - ECO N O MY M AC R O ECO N O M I C S A N D T H E
I N T E R N AT I O N A L M O N E TA RY S Y S T E M
16 The Price Adjustment Mechanism with Flexible and Fixed Exchange Rates 437
17 The Income Adjustment Mechanism and Synthesis of Automatic Adjustments 465
18 Open Economy Macroeconomics: Adjustment Policies 493
19 Prices and Output in an Open Economy: Aggregate Demand
and Aggregate Supply 531
20 Flexible versus Fixed Exchange Rates, the European Monetary System,
and Macroeconomic Policy Coordination 555
21 The International Monetary System: Past, Present, and Future 589

Answers to Selected Problems On Web

Glossary of Key Terms 623
Name Index 637
Subject Index 641

xiii

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Salvatore_fbrief.indd 14 11/16/2015 11:47:12 PM
 Contents

1 INT R ODU CT I ON 1

1.1 The Globalization of the World Economy 1

1.1A We Live in a Global Economy 1
CASE STUDY 1-1 The Dell PCs, iPhones, and iPads Sold in the
United States are Anything but American! 2
1.1B The Globalization Challenge 2
CASE STUDY 1-2 What Is an “American” Car? 3
1.2 International Trade and the Nation’s Standard of Living 4
CASE STUDY 1-3 Is India’s Globalization Harming the United States? 5
CASE STUDY 1-4 Rising Importance of International Trade to the
United States 7
1.3 The International Flow of Goods, Services, Labor, and Capital 8
1.3A The International Flow of Goods and Services: The Gravity Model 8
1.3B The International Flow of Labor and Capital 9
CASE STUDY 1-5 The Gravity Model at Work 10
CASE STUDY 1-6 Major Net Exporters and Importers of Capital 11
1.3C Globalization Before and After the Global Financial Crisis 11
1.4 International Economic Theories and Policies 12
1.4A Purpose of International Economic Theories and Policies 12
1.4B The Subject Matter of International Economics 13
1.5 Current International Economic Problems and Challenges 14
1.6 Organization and Methodology of the Text 16
1.6A Organization of the Text 16
1.6B Methodology of the Text 17
Summary 18
Key Terms 19
Questions For Review 19
Problems 19
Appendix 20
A1.1 Basic International Trade Data 20
A1.2 Sources of Additional International Data and Information 24
Selected Bibliography (on Web)
INTERNet (on Web)

xv

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 xvi Contents

Part 1 International Trade Theory

2 T H E LAW OF COMPA RAT I V E A DVA N TAG E 29

2.1 Introduction 29
2.2 The Mercantilists’ Views on Trade 30
CASE STUDY 2-1 Munn’s Mercantilistic Views on Trade 30
CASE STUDY 2-2 Mercantilism Is Alive and Well in the Twenty-First
Century 31
2.3 Trade Based on Absolute Advantage: Adam Smith 32
2.3A Absolute Advantage 32
2.3B Illustration of Absolute Advantage 33
2.4 Trade Based on Comparative Advantage: David Ricardo 33
2.4A The Law of Comparative Advantage 34
2.4B The Gains from Trade 34
2.4C The Case of No Comparative Advantage 36
2.4D Comparative Advantage with Money 36
CASE STUDY 2-3 The Petition of the Candlemakers 38
2.5 Comparative Advantage and Opportunity Costs 38
2.5A Comparative Advantage and the Labor Theory of Value 38
2.5B The Opportunity Cost Theory 39
2.5C The Production Possibility Frontier Under Constant Costs 39
2.5D Opportunity Costs and Relative Commodity Prices 41
2.6 The Basis for and the Gains from Trade under Constant Costs 42
2.6A Illustration of the Gains from Trade 42
2.6B Relative Commodity Prices with Trade 43
2.7 Empirical Tests of the Ricardian Model 44
CASE STUDY 2-4 Other Empirical Tests of the Ricardian Model 46
Summary 47
Key Terms 48
Questions for Review 48
Problems 49
Appendix 50
A2.1 Comparative Advantage with More Than Two Commodities 50
A2.2 Comparative Advantage with More Than Two Nations 52
Selected Bibliography (on Web)
INTERNet (on Web)

3 T H E S TANDA RD T H EO RY O F I N T E RN AT I O N A L T RA D E 53

3.1 Introduction 53
3.2 The Production Frontier with Increasing Costs 53

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 Contents xvii

3.2A Illustration of Increasing Costs 54

3.2B The Marginal Rate of Transformation 55
3.2C Reasons for Increasing Opportunity Costs and Different Production
Frontiers 55
3.3 Community Indifference Curves 56
3.3A Illustration of Community Indifference Curves 56
3.3B The Marginal Rate of Substitution 57
3.3C Some Difficulties with Community Indifference Curves 57
3.4 Equilibrium in Isolation 57
3.4A Illustration of Equilibrium in Isolation 58
3.4B Equilibrium-Relative Commodity Prices
and Comparative Advantage 59
CASE STUDY 3-1 The Comparative Advantage of the Largest Advanced
and Emerging Economies 59
3.5 The Basis for and the Gains from Trade with Increasing Costs 60
3.5A Illustrations of the Basis for and the Gains from Trade
with Increasing Costs 60
3.5B Equilibrium-Relative Commodity Prices with Trade 61
3.5C Incomplete Specialization 62
3.5D Small-Country Case with Increasing Costs 62
CASE STUDY 3-2 Specialization and Export Concentration in Selected
Countries 63
3.5E The Gains from Exchange and from Specialization 63
CASE STUDY 3-3 Job Losses in High U.S. Import-Competing
Industries 64
CASE STUDY 3-4 International Trade and Deindustrialization
in the United States, the European Union, and
Japan 65
3.6 Trade Based on Differences in Tastes 66
3.6A Illustration of Trade Based on Differences in Tastes 67
Summary 68
Key Terms 69
Questions for Review 69
Problems 69
Appendix 71
A3.1 Production Functions, Isoquants, Isocosts, and Equilibrium 71
A3.2 Production Theory with Two Nations, Two Commodities,
and Two Factors 72
A3.3 Derivation of the Edgeworth Box Diagram and Production Frontiers 73
A3.4 Some Important Conclusions 76
Selected Bibliography (on Web)
INTERNet (on Web)

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 xviii Contents

4 DEMAND AND SUPPLY, OFFER CURVES, AND THE TERMS OF TRADE 79

4.1 Introduction 79
4.2 The Equilibrium-Relative Commodity Price with Trade—Partial
Equilibrium Analysis 79
CASE STUDY 4-1 Demand, Supply, and the International Price of
Petroleum 81
CASE STUDY 4-2 The Index of Export to Import Prices for the United
States 82
4.3 Offer Curves 82
4.3A Origin and Definition of Offer Curves 82
4.3B Derivation and Shape of the Offer Curve of Nation 1 83
4.3C Derivation and Shape of the Offer Curve of Nation 2 84
4.4 The Equilibrium-Relative Commodity Price with Trade—General Equilibrium
Analysis 85
4.5 Relationship Between General and Partial Equilibrium Analyses 86
4.6 The Terms of Trade 88
4.6A Definition and Measurement of the Terms of Trade 88
4.6B Illustration of the Terms of Trade 88
CASE STUDY 4-3 The Terms of Trade of the G-7 Countries 89
CASE STUDY 4-4 The Terms of Trade of Industrial and Developing
Countries 89
4.6C Usefulness of the Model 90
Summary 90
Key Terms 91
Questions for Review 91
Problems 92
Appendix 92
A4.1 Derivation of a Trade Indifference Curve for Nation 1 93
A4.2 Derivation of Nation 1’s Trade Indifference Map 94
A4.3 Formal Derivation of Nation 1’s Offer Curve 95
A4.4 Outline of the Formal Derivation of Nation 2’s Offer Curve 97
A4.5 General Equilibrium of Production, Consumption, and Trade 98
A4.6 Multiple and Unstable Equilibria 99
Selected Bibliography (on Web)
INTERNet (on Web)

5 FACTOR ENDOWMENTS AND THE HECKSCHER–OHLIN THEORY 101

5.1 Introduction 101

5.2 Assumptions of the Theory 102
5.2A The Assumptions 102
5.2B Meaning of the Assumptions 102

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 Contents xix

5.3 Factor Intensity, Factor Abundance, and the Shape of the Production
Frontier 103
5.3A Factor Intensity 104
5.3B Factor Abundance 105
5.3C Factor Abundance and the Shape of the Production Frontier 106
CASE STUDY 5-1 Relative Resource Endowments of Various
Countries 107
CASE STUDY 5-2 Capital–Labor Ratios of Selected Countries 108
5.4 Factor Endowments and the Heckscher–Ohlin Theory 109
5.4A The Heckscher—Ohlin Theorem 109
5.4B General Equilibrium Framework of the Heckscher–Ohlin Theory 110
5.4C Illustration of the Heckscher—Ohlin Theory 111
CASE STUDY 5-3 Classification of Major Product Categories in Terms of
Factor Intensity 112
CASE STUDY 5-4 The Factor Intensity of Trade of Various Countries 113
5.5 Factor–Price Equalization and Income Distribution 114
5.5A The Factor–Price Equalization Theorem 114
5.5B Relative and Absolute Factor–Price Equalization 115
5.5C Effect of Trade on the Distribution of Income 116
CASE STUDY 5-5 Has International Trade Increased U.S. Wage
Inequalities? 117
5.5D The Specific-Factors Model 118
5.5E Empirical Relevance 119
CASE STUDY 5-6 Convergence of Real Wages among Advanced
Countries 120
5.6 Empirical Tests of the Heckscher–Ohlin Model 121
5.6A Empirical Results—The Leontief Paradox 121
CASE STUDY 5-7 Capital and Labor Requirements in U.S. Trade 122
5.6B Explanations of the Leontief Paradox and Other Empirical Tests of the
H–O Model 123
CASE STUDY 5-8 The H–O Model with Skills and Land 125
5.6C Factor–Intensity Reversal 126
Summary 127
Key Terms 128
Questions for Review 129
Problems 129
Appendix 130
A5.1 The Edgeworth Box Diagram for Nation 1 and Nation 2 131
A5.2 Relative Factor–Price Equalization 132
A5.3 Absolute Factor–Price Equalization 134
A5.4 Effect of Trade on the Short-Run Distribution of Income: The Specific-Factors
Model 134
A5.5 Illustration of Factor–Intensity Reversal 136

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 xx Contents

A5.6 The Elasticity of Substitution and Factor–Intensity Reversal 138

A5.7 Empirical Tests of Factor–Intensity Reversal 139
Selected Bibliography (on Web)
INTERNet (on Web)

6 ECONOMI ES O F SC A L E , IMP E RF EC T COMP E T I T I O N , A N D

I NT ER NAT I O N A L T RA D E 1 41

6.1 Introduction 141

6.2 The Heckscher–Ohlin Model and New Trade Theories 141
6.3 Economies of Scale and International Trade 143
CASE STUDY 6-1 The New International Economies of Scale 145
CASE STUDY 6-2 Job Loss Rates in U.S. Industries and
Globalization 146
6.4 Imperfect Competition and International Trade 146
6.4A Trade Based on Product Differentiation 146
CASE STUDY 6-3 U.S. Intra-Industry Trade in Automotive
Products 147
CASE STUDY 6-4 Variety Gains with International Trade 148
6.4B Relationship Between Intra-Industry and H–O Trade Models 149
6.4C Measuring Intra-Industry Trade 150
CASE STUDY 6-5 Growth of Intra-Industry Trade 150
CASE STUDY 6-6 Intra-Industry Trade Indexes for G-20 Countries 151
CASE STUDY 6-7 Index of Intra-Industry Trade of Some U.S. Industries,
2013 152
6.4D Formal Model of Intra-Industry Trade 153
6.4E Another Version of the Intra-Industry Trade Model 154
6.5 Trade Based on Dynamic Technological Differences 155
6.5A Technological Gap and Product Cycle Models 156
6.5B Illustration of the Product Cycle Model 157
CASE STUDY 6-8 The United States as the Most Competitive
Economy 158
6.6 Costs of Transportation, Environmental Standards, and International
Trade 159
6.6A Costs of Transportation and Nontraded Commodities 159
6.6B Costs of Transportation and the Location of Industry 161
6.6C Environmental Standards, Industry Location, and International
Trade 161
CASE STUDY 6-9 Environmental Performance Index 162
Summary 163
Key Terms 164
Questions for Review 164
Problems 164

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 Contents xxi

Appendix 165
A6.1 External Economies and the Pattern of Trade 165
A6.2 Dynamic External Economies and Specialization 167
Selected Bibliography (on Web)
INTERNet (on Web)

7 ECONOMI C G R OWT H AND IN T E RN AT I O N A L T RA D E 169

7.1 Introduction 169

7.2 Growth of Factors of Production 170
7.2A Labor Growth and Capital Accumulation over Time 170
7.2B The Rybczynski Theorem 171
7.3 Technical Progress 172
7.3A Neutral, Labor-Saving, and Capital-Saving Technical Progress 173
7.3B Technical Progress and the Nation’s Production Frontier 173
CASE STUDY 7-1 Growth in the Capital Stock per Worker of Selected
Countries 175
7.4 Growth and Trade: The Small-Country Case 175
7.4A The Effect of Growth on Trade 176
7.4B Illustration of Factor Growth, Trade, and Welfare 176
7.4C Technical Progress, Trade, and Welfare 178
CASE STUDY 7-2 Growth in Output per Worker from Capital Deepening,
Technological Change, and Improvements in
Efficiency 179
7.5 Growth and Trade: The Large-Country Case 180
7.5A Growth and the Nation’s Terms of Trade and Welfare 180
7.5B Immiserizing Growth 181
7.5C Illustration of Beneficial Growth and Trade 182
CASE STUDY 7-3 Growth and the Emergence of New Economic
Giants 184
7.6 Growth, Change in Tastes, and Trade in Both Nations 185
7.6A Growth and Trade in Both Nations 185
7.6B Change in Tastes and Trade in Both Nations 186
CASE STUDY 7-4 Growth, Trade, and Welfare in the Leading Industrial
Countries 187
Summary 187
Key Terms 188
Questions for Review 188
Problems 189
Appendix 190
A7.1 Formal Proof of the Rybczynski Theorem 190
A7.2 Growth with Factor Immobility 192
A7.3 Graphical Analysis of Hicksian Technical Progress 193

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Selected Bibliography (on Web)

INTERNet (on Web)

Part 2 International Trade Policy

8 T R ADE R ES T RI C T I O N S: TA RI F F S 1 97

8.1 Introduction 197

CASE STUDY 8-1 Average Tariff on Nonagricultural Products in Major
Developed Countries 198
CASE STUDY 8-2 Average Tariffs on Nonagricultural Products in Some
Major Developing Countries 199
8.2 Partial Equilibrium Analysis of a Tariff 199
8.2A Partial Equilibrium Effects of a Tariff 199
8.2B Effect of a Tariff on Consumer and Producer Surplus 200
8.2C Costs and Benefits of a Tariff 202
CASE STUDY 8-3 The Welfare Effect of Liberalizing Trade on Some U.S.
Products 203
CASE STUDY 8-4 The Welfare Effect of Liberalizing Trade on Some EU
Products 204
8.3 The Theory of Tariff Structure 205
8.3A The Rate of Effective Protection 205
8.3B Generalization and Evaluation of the Theory of Effective
Protection 206
CASE STUDY 8-5 Structure of Tariffs on Industrial Products in the United
States, the European Union, Japan, and Canada 207
CASE STUDY 8-6 Tariff Escalation in Developed and Developing
Nations 208
8.4 General Equilibrium Analysis of a Tariff in a Small Country 208
8.4A General Equilibrium Effects of a Tariff in a Small Country 209
8.4B Illustration of the Effects of a Tariff in a Small Country 209
8.4C The Stolper–Samuelson Theorem 211
8.5 General Equilibrium Analysis of a Tariff in a Large Country 211
8.5A General Equilibrium Effects of a Tariff in a Large Country 212
8.5B Illustration of the Effects of a Tariff in a Large Country 212
8.6 The Optimum Tariff 213
8.6A The Meaning of the Concept of Optimum Tariff and Retaliation 213
8.6B Illustration of the Optimum Tariff and Retaliation 214
Summary 215
Key Terms 216
Questions for Review 216

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 Contents xxiii

Problems 217
Appendix 217
A8.1 Partial Equilibrium Effects of a Tariff in a Large Nation 218
A8.2 Derivation of the Formula for the Rate of Effective Protection 220
A8.3 The Stolper–Samuelson Theorem Graphically 221
A8.4 Exception to the Stolper–Samuelson Theorem—The Metzler Paradox 222
A8.5 Short-Run Effect of a Tariff on Factors’ Income 224
A8.6 Measurement of the Optimum Tariff 225
Selected Bibliography (on Web)
INTERNet (on Web)

9 NONTAR I F F T R ADE BAR R I ERS A N D T H E N E W P ROT EC T I O N I SM 227

9.1 Introduction 227

9.2 Import Quotas 227
9.2A Effects of an Import Quota 228
CASE STUDY 9-1 The Economic Effects of the U.S. Quota on Sugar
Imports 229
9.2B Comparison of an Import Quota to an Import Tariff 229
9.3 Other Nontariff Barriers and the New Protectionism 230
9.3A Voluntary Export Restraints 230
CASE STUDY 9-2 Voluntary Export Restraints (VERs) on Japanese
Automobiles to the United States and Europe 231
9.3B Technical, Administrative, and Other Regulations 232
9.3C International Cartels 232
9.3D Dumping 233
CASE STUDY 9-3 Antidumping Investigations by G20 Members 235
9.3E Export Subsidies 235
CASE STUDY 9-4 Agricultural Subsidies in OECD Countries 236
CASE STUDY 9-5 Pervasiveness of Nontariff Barriers 237
9.3F Analysis of Export Subsidies 238
9.4 The Political Economy of Protectionism 239
9.4A Fallacious and Questionable Arguments for Protection 239
9.4B The Infant-Industry and Other Qualified Arguments for Protection 240
9.4C Who Gets Protected? 241
CASE STUDY 9-6 Benefits to the World Economy from Complete Trade
Liberalization 242
9.5 Strategic Trade and Industrial Policies 243
9.5A Strategic Trade Policy 243
9.5B Strategic Trade and Industrial Policies with Game Theory 244
9.5C The U.S. Response to Foreign Industrial Targeting and Strategic Trade
Policies 245

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Another random document with
no related content on Scribd:
 Doubtless Livingston was right in securing his main object at any
cost; but could he have given more time to his claims convention, he
would perhaps have saved his own reputation and that of his
successor from much stain, although he might have gained no more
than he did for his Government. In the two conventions of 1800 and
1803 the United States obtained two objects of the utmost value,—
by the first, a release from treaty obligations which, if carried out,
required war with England; by the second, the whole west bank of
the Mississippi River and the island of New Orleans, with all the
incidental advantages attached. In return for these gains the United
States government promised not to press the claims of its citizens
against the French government beyond the amount of three million
seven hundred and fifty thousand dollars, which was one fourth part
of the price paid for Louisiana. The legitimate claims of American
citizens against France amounted to many million dollars; in the
result, certain favored claimants received three million seven
hundred and fifty thousand dollars less their expenses, which
reduced the sum about one half.
The impression of diplomatic oversight was deepened by the
scandals which grew out of the distribution of the three million seven
hundred and fifty thousand dollars which the favored claimants were
to receive. Livingston’s diplomatic career was poisoned by quarrels
over this money.[46] That the French government acted with little
concealment of venality was no matter of surprise; but that
Livingston should be officially charged by his own associates with
favoritism and corruption,—“imbecility of mind and a childish vanity,
mixed with a considerable portion of duplicity,”—injured the credit of
his Government; and the matter was not bettered when he threw
back similar charges on the Board of Commissioners, or when at last
General Armstrong, coming to succeed him, was discredited by
similar suspicions. Considering how small was the amount of money
distributed, the scandal and corruption surpassed any other
experience of the national government.
Livingston’s troubles did not end there. He could afford to suffer
some deduction from his triumph; for he had achieved the greatest
diplomatic success recorded in American history. Neither Franklin,
Jay, Gallatin, nor any other American diplomatist was so fortunate as
Livingston for the immensity of his results compared with the paucity
of his means. Other treaties of immense consequence have been
signed by American representatives,—the treaty of alliance with
France; the treaty of peace with England which recognized
independence; the treaty of Ghent; the treaty which ceded Florida;
the Ashburton treaty; the treaty of Guadeloupe Hidalgo,—but in none
of these did the United States government get so much for so little.
The annexation of Louisiana was an event so portentous as to defy
measurement; it gave a new face to politics, and ranked in historical
importance next to the Declaration of Independence and the
adoption of the Constitution,—events of which it was the logical
outcome; but as a matter of diplomacy it was unparalleled, because
it cost almost nothing.
The scandalous failure of the claims convention was a trifling
drawback to the enjoyment of this unique success; but the success
was further embittered by the conviction that America would give the
honor to Monroe. Virginia was all-powerful. Livingston was
unpopular, distrusted, not liked even by Madison; while Monroe, for
political reasons, had been made a prominent figure. Public attention
had been artificially drawn upon his mission; and in consequence,
Monroe’s name grew great, so as almost to overshadow that of
Madison, while Livingston heard few voices proclaiming his services
to the country. In a few weeks Livingston began to see his laurels
wither, and was forced to claim the credit that he thought his due.
Monroe treated him less generously than he might have done,
considering that Monroe gained the political profit of the success.[47]
Acknowledging that his own share was next to nothing in the
negotiation, he still encouraged the idea that Livingston’s influence
had been equally null. This view was doubtless correct, but if
universally applied in history, would deprive many great men of their
laurels. Monroe’s criticism helped only to diminish the political
chances of a possible rival who had no Virginia behind him to press
his preferment and cover his mistakes.
 CHAPTER III.
When Marbois took the treaty to the First Consul, Bonaparte
listened to its provisions with lively interest; and on hearing that
twenty millions were to be employed in paying claims,—a use of
money which he much disliked,—he broke out: “Who authorized you
to dispose of the money of the State? I want to have these twenty
millions paid into the Treasury. The claimants’ rights cannot come
before our own.”[48] His own projet had required the Americans to
assume these claims,—which was, in fact, the better plan. Marbois’s
alteration turned the claims into a French job. Perhaps Bonaparte
was not averse to this; for when Marbois reminded him that he had
himself fixed the price at fifty millions, whereas the treaty gave him
sixty, and settled the claims besides,—“It is true,” he said; “the
negotiation leaves me nothing to wish. Sixty millions for an
occupation that will not perhaps last a day! I want France to have the
good of this unexpected capital, and to employ it in works of use to
her marine.” On the spot he dictated a decree for the construction of
five canals. This excellent use of the money seemed inconsistent
with Lucien’s remark that it was wanted for war,—but the canals
were never built or begun; and the sixty millions were spent, to the
last centime, in preparations for an impracticable descent on
England.
Yet money was not the inducement which caused Bonaparte to
sell Louisiana to the United States. The Prince of Peace would at
any time have given more money, and would perhaps have been
willing, as he certainly was able, to pay it from his private means
rather than allow the United States to own Louisiana. In other
respects, the sale needed explanation, since it contradicted the First
Consul’s political theories and prejudices. He had but two rooted
hatreds. The deeper and fiercer of these was directed against the
republic,—the organized democracy, and what he called ideology,
which Americans knew in practice as Jeffersonian theories; the
second and steadier was his hatred of England as the chief barrier to
his military omnipotence. The cession of Louisiana to the United
States contradicted both these passions, making the ideologists
supreme in the New World, and necessarily tending in the end to
strengthen England in the Old. Bonaparte had been taught by
Talleyrand that America and England, whatever might be their
mutual jealousies, hatreds, or wars, were socially and economically
one and indivisible. Barely ten years after the Revolutionary War had
closed, and at a time when the wounds it made were still raw,
Talleyrand remarked: “In every part of America through which I have
travelled, I have not found a single Englishman who did not feel
himself to be an American; not a single Frenchman who did not find
himself a stranger.” Bonaparte knew that England held the monopoly
of American trade, and that America held the monopoly of
democratic principles; yet he did an act which was certain to extend
British trade and fortify democratic principles.
This contradiction was due to no change in Bonaparte’s opinions;
these remained what they were. At the moment when talking to
Marbois about “those republicans whose friendship I seek,” he was
calculating on the chance that his gift would one day prove their ruin.
“Perhaps it will also be objected to me,” he said,[49] “that the
Americans may in two or three centuries be found too powerful for
Europe; but my foresight does not embrace such remote fears.
Besides, we may hereafter expect rivalries among the members of
the Union. The confederations that are called perpetual last only till
one of the contracting parties finds it to its interest to break them.... It
is to prevent the danger to which the colossal power of England
exposes us that I would provide a remedy.” The colossal power of
England depended on her navy, her colonies, and her manufactures.
Bonaparte proposed to overthrow it by shattering beyond repair the
colonial system of France and Spain; and even this step was
reasonable compared with what followed. He expected to check the
power of England by giving Louisiana to the United States,—a
measure which opened a new world to English commerce and
manufactures, and riveted England’s grasp on the whole American
continent, inviting her to do what she afterward did,—join hands with
the United States in revolutionizing Mexico and South America in her
own interests. As though to render these results certain, after
extending this invitation to English commerce and American
democracy, Bonaparte next invited a war with England, which was
certain to drive from the ocean every ship belonging to France or
Spain,—a war which left even the United States at England’s mercy.
Every detail that could explain Bonaparte’s motives becomes
interesting in a matter so important to American history. Certain
points were clear. Talleyrand’s colonial and peace policy failed.
Resting on the maintenance of order in Europe and the extension of
French power in rivalry with the United States and England in
America, it was a statesmanlike and honorable scheme, which
claimed for the Latin races what Louis XIV. tried to gain for them; but
it had the disadvantage of rousing hostility in the United States, and
of throwing them into the arms of England. For this result Talleyrand
was prepared. He knew that he could keep peace with England, and
that the United States alone could not prevent him from carrying out
his policy. Indeed, Madison in his conversation with Pichon invited
such action, and Jefferson had no means of resisting it; but from the
moment when St. Domingo prevented the success of the scheme,
and Bonaparte gained an excuse for following his own military
instincts, the hostility of the United States became troublesome.
President Jefferson had chiefly reckoned on this possibility as his
hope of getting Louisiana; and slight as the chance seemed, he was
right.
This was, in effect, the explanation which Talleyrand officially
wrote to his colleague Decrès, communicating a copy of the treaty,
and requesting him to take the necessary measures for executing it.
[50]

“The wish to spare the North American continent the war with
which it was threatened, to dispose of different points in dispute
between France and the United States of America, and to remove all
the new causes of misunderstanding which competition and
neighborhood might have produced between them; the position of the
French colonies; their want of men, cultivation, and assistance; in fine,
the empire of circumstances, foresight of the future, and the intention
to compensate by an advantageous arrangement for the inevitable
loss of a country which war was going to put at the mercy of another
nation,—all these motives have determined the Government to pass
 to the United States the rights it had acquired from Spain over the
sovereignty and property of Louisiana.”
Talleyrand’s words were always happily chosen, whether to
reveal or to conceal his thoughts. This display of reasons for an act
which he probably preferred to condemn, might explain some of the
First Consul’s motives in ceding Louisiana to the United States; but it
only confused another more perplexing question. Louisiana did not
belong to France, but to Spain. The retrocession had never been
completed; the territory was still possessed, garrisoned, and
administered by Don Carlos IV.; until actual delivery was made,
Spain might yet require that the conditions of retrocession should be
rigorously performed. Her right in the present instance was
complete, because she held as one of the conditions precedent to
the retrocession a solemn pledge from the First Consul never to
alienate Louisiana. The sale of Louisiana to the United States was
trebly invalid: if it were French property, Bonaparte could not
constitutionally alienate it without the consent of the Chambers; if it
were Spanish property, he could not alienate it at all; if Spain had a
right of reclamation, his sale was worthless. In spite of all these
objections the alienation took place; and the motives which led the
First Consul to conciliate America by violating the Constitution of
France were perhaps as simple as he represented them to be; but
no one explained what motives led Bonaparte to break his word of
honor and betray the monarchy of Spain.
Bonaparte’s evident inclination toward a new war with England
greatly distressed King Charles IV. Treaty stipulations bound Spain
either to take part with France in the war, or to pay a heavy annual
subsidy; and Spain was so weak that either alternative seemed fatal.
The Prince of Peace would have liked to join England or Austria in a
coalition against Bonaparte; but he knew that to this last desperate
measure King Charles would never assent until Bonaparte’s hand
was actually on his crown; for no one could reasonably doubt that
within a year after Spain should declare an unsuccessful war on
France, the whole picturesque Spanish court—not only Don Carlos
IV. himself and Queen Luisa, but also the Prince of Peace, Don
Pedro Cevallos, the Infant Don Ferdinand, and the train of courtiers
who thronged La Granja and the Escorial—would be wandering in
exile or wearing out their lives in captivity. To increase the
complication, the young King of Etruria died May 27, 1803, leaving
an infant seated upon the frail throne which was sure soon to
disappear at the bidding of some military order countersigned by
Berthier.
In the midst of such anxieties, Godoy heard a public rumor that
Bonaparte had sold Louisiana to the United States; and he felt it as
the death-knell of the Spanish empire. Between the energy of the
American democracy and the violence of Napoleon whom no oath
bound, Spain could hope for no escape. From New Orleans to Vera
Cruz was but a step; from Bayonne to Cadiz a winter campaign of
some five or six hundred miles. Yet Godoy would probably have
risked everything, and would have thrown Spain into England’s
hands, had he been able to control the King and Queen, over whom
Bonaparte exercised the influence of a master. On learning the sale
of Louisiana, the Spanish government used language almost
equivalent to a rupture with France. The Spanish minister at Paris
was ordered to remonstrate in the strongest terms against the step
which the First Consul had taken behind the back of the King his ally.
[51]

“This alienation,” wrote the Chevalier d’Azara to Talleyrand, “not

only deranges from top to bottom the whole colonial system of Spain,
and even of Europe, but is directly opposed to the compacts and
formal stipulations agreed upon between France and Spain, and to
the terms of the cession in the treaty of Tuscany; and the King my
master brought himself to give up the colony only on condition that it
should at no time, under no pretext, and in no manner, be alienated or
ceded to any other Power.”
Then, after reciting the words of Gouvion St.-Cyr’s pledge, the
note continued:—
“It is impossible to conceive more frankness or loyalty than the
King has put into his conduct toward France throughout this affair. His
Majesty had therefore the right to expect as much on the part of his
ally, but unhappily finds himself deceived in his hopes by the sale of
the said colony. Yet trusting always in the straightforwardness and
justice of the First Consul, he has ordered me to make this
 representation, and to protest against the alienation, hoping that it will
be revoked, as manifestly contrary to the treaties and to the most
solemn anterior promises.”
Not stopping there, the note also insisted that Tuscany should be
evacuated by the French troops, who were not needed, and had
become an intolerable burden, so that the country was reduced to
the utmost misery. Next, King Charles demanded that Parma and
Piacenza should be surrendered to the King of Etruria, to whom they
belonged as the heir of the late Duke of Parma. Finally, the note
closed with a complaint even more grave in substance than any of
the rest:—
“The King my master could have wished also a little more friendly
frankness in communicating the negotiations with England, and
especially in regard to the dispositions of the Northern courts,
guarantors of the treaty of Amiens; but as this affair belongs to
negotiations of another kind, the undersigned abstains for the moment
from entering into them, reserving the right to do so on a better
occasion.”
Beurnonville, the French minister at Madrid, tried to soothe or
silence the complaints of Cevallos; but found himself only silenced in
return. The views of the Spanish secretary were energetic, precise,
and not to be met by argument.[52] “I have not been able to bring M.
Cevallos to any moderate, conciliatory, or even calm expression,”
wrote Beurnonville to Talleyrand; “he has persistently shown himself
inaccessible to all persuasion.” The Prince of Peace was no more
manageable than Cevallos: “While substituting a soft and pliant tone
for the sharpest expressions, and presenting under the appearance
of regret what had been advanced to me with the bitterness of
reproach, the difference between the Prince’s conduct and that of M.
Cevallos is one only in words.” Both of them said, what was quite
true, that the United States would not have objected to the continued
possession of Louisiana by Spain, and that France had greatly
exaggerated the dispute about the entrepôt.
“The whole matter reduces itself to a blunder (gaucherie) of the
Intendant,” said Cevallos; “it has been finally explained to Mr.
Jefferson, and friendship is restored. On both sides there has been
irritation, but not a shadow of aggression; and from the moment of
 coming to an understanding, both parties see that they are at bottom
of one mind, and mutually very well disposed toward each other.
Moreover, it is quite gratuitous to assume that Louisiana is so easy to
take in the event of a war, either by the Americans or by the English.
The first have only militia,—very considerable, it is true, but few troops
of the line; while Louisiana, at least for the moment, has ten thousand
militia-men, and a body of three thousand five hundred regular troops.
As for the English, they cannot seriously have views on a province
which is impregnable to them; and all things considered, it would be
no great calamity if they should take it. The United States, having a
much firmer hold on the American continent, should they take a new
enlargement, would end by becoming formidable, and would one day
disturb the Spanish possessions. As for the debts due to Americans,
Spain has still more claim to an arrangement of that kind; and in any
case the King, as Bonaparte must know, would have gladly
discharged all the debts contracted by France, and perhaps even a
large instalment of the American claim, in order to recover an old
domain of the crown. Finally, the intention which led the King to give
his consent to the exchange of Louisiana was completely deceived.
This intention had been to interpose a strong dyke between the
Spanish colonies and the American possessions; now, on the
contrary, the doors of Mexico are to stay open to them.”
To these allegations, which Beurnonville called “insincere, weak,
and ill-timed,” Cevallos added a piece of evidence which, strangely
enough, was altogether new to the French minister, and reduced him
to confusion: it was Gouvion St.-Cyr’s letter, pledging the First
Consul never to alienate Louisiana.
When Beurnonville’s despatch narrating these interviews reached
Paris, it stung Bonaparte to the quick, and called from him one of the
angry avowals with which he sometimes revealed a part of the
motives that influenced his strange mind. Talleyrand wrote back to
Beurnonville, June 22, a letter which bore the mark of the First
Consul’s hand.
“In one of my last letters,” he began,[53] “I made known to you the
motives which determined the Government to give up Louisiana to the
United States. You will not conceal from the Court of Madrid that one
of the causes which had most influence on this determination was
discontent at learning that Spain, after having promised to sustain the
measures taken by the Intendant of New Orleans, had nevertheless
 formally revoked them. These measures would have tended to free
the capital of Louisiana from subjection to a right of deposit which was
becoming a source of bickerings between the Louisianians and
Americans. We should have afterward assigned to the United States,
in conformity to their treaty with Spain, another place of deposit, less
troublesome to the colony and less injurious to its commerce; but
Spain put to flight all these hopes by confirming the privileges of the
Americans at New Orleans,—thus granting them definitively local
advantages which had been at first only temporary. The French
government, which had reason to count on the contrary assurance
given in this regard by that of Spain, had a right to feel surprise at this
determination; and seeing no way of reconciling it with the commercial
advantages of the colony and with a long peace between the colony
and its neighbors, took the only course which actual circumstances
and wise prevision could suggest.”
These assertions contained no more truth than those which
Cevallos had answered. Spain had not promised to sustain the
Intendant, nor had she revoked the Intendant’s measures after, but
before, the imagined promise; she had not confirmed the American
privileges at New Orleans, but had expressly reserved them for
future treatment. On the other hand, the restoration of the deposit
was not only reconcilable with peace between Louisiana and the
United States, but the whole world knew that the risk of war rose
from the threat of disturbing the right of deposit. The idea that the
colony had become less valuable on this account was new. France
had begged for the colony with its American privileges, and meaning
to risk the chances of American hostility; but if these privileges were
the cause of selling the colony to the Americans, and if, as
Talleyrand implied, France could and would have held Louisiana if
the right of deposit at New Orleans had been abolished and the
Americans restricted to some other spot on the river-bank, fear of
England was not, as had been previously alleged, the cause of the
sale. Finally, if the act of Spain made the colony worthless, why was
Spain deprived of the chance to buy it back?
The answer was evident. The reason why Bonaparte did not
keep his word to Don Carlos IV. was that he looked on Spain as his
own property, and on himself as representing her sovereignty. The
reasons for which he refused to Spain the chance to redeem the
colony, were probably far more complicated. The only obvious
explanation, assuming that he still remembered his pledge, was a
wish to punish Spain.
After all these questions were asked, one problem still remained.
Bonaparte had reasons for not returning the colony to Spain; he had
reasons, too, for giving it to the United States,—but why did he
alienate the territory from France? Fear of England was not the true
cause. He had not to learn how to reconquer Louisiana on the
Danube and the Po. At one time or another Great Britain had
captured nearly all the French colonies in the New World, and had
been forced not only to disgorge conquests, but to abandon
possessions; until of the three great European Powers in America,
England was weakest. Any attempt to regain old ascendency by
conquering Louisiana would have thrown the United States into the
hands of France; and had Bonaparte anticipated such an act, he
should have helped it. That Great Britain should waste strength in
conquering Louisiana in order to give it to the United States, was an
idea not to be gravely argued. Jefferson might, indeed, be driven into
an English alliance in order to take Louisiana by force from France or
Spain; but this danger was slight in itself, and might have been
removed by the simple measure of selling only the island of New
Orleans, and by retaining the west bank, which Jefferson was ready
to guarantee. This was the American plan; and the President offered
for New Orleans alone about half the price he paid for all Louisiana.
[54] Still, Bonaparte forced the west bank on Livingston. Every
diplomatic object would have been gained by accepting Jefferson’s
projet of a treaty, and signing it without the change of a word. Spain
would have been still in some degree protected; England would have
been tempted to commit the mistake of conquering the retained
territory, and thereby the United States would have been held in
check; the United States would have gained all the stimulus their
ambition could require for many years to come; and what was more
important to Bonaparte, France could not justly say that he had
illegally and ignobly sold national territory except for a sufficient and
national object.
 The real reasons which induced Bonaparte to alienate the
territory from France remained hidden in the mysterious processes
of his mind. Perhaps he could not himself have given the true
explanation of his act. Anger with Spain and Godoy had a share in it,
as he avowed through Talleyrand’s letter of June 22; disgust for the
sacrifices he had made, and impatience to begin his new campaigns
on the Rhine,—possibly a wish to show Talleyrand that his policy
could never be revived, and that he had no choice but to follow into
Germany,—had still more to do with the act. Yet it is also reasonable
to believe that the depths of his nature concealed a wish to hide
forever the monument of a defeat. As he would have liked to blot
Corsica, Egypt, and St. Domingo from the map, and wipe from
human memory the record of his failures, he may have taken
pleasure in flinging Louisiana far off, and burying it forever from the
sight of France in the bosom of the only government which could
absorb and conceal it.
For reasons of his own, which belonged rather to military and
European than to American history, Bonaparte preferred to deal with
Germany before crossing the Pyrenees; and he knew that
meanwhile Spain could not escape. Godoy on his side could neither
drag King Charles into a war with France, nor could he provide the
means of carrying on such a war with success. Where strong nations
like Austria, Russia, and Prussia were forced to crouch before
Bonaparte, and even England would have been glad to accept
tolerable terms, Spain could not challenge attack. The violent anger
that followed the sale of Louisiana and the rupture of the peace of
Amiens soon subsided. Bonaparte, aware that he had outraged the
rights of Spain, became moderate. Anxious to prevent her from
committing any act of desperation, he did not require her to take part
in the war, but even allowed her stipulated subsidies to run in
arrears; and although he might not perhaps regret his sale of
Louisiana to the United States, he felt that he had gone too far in
shaking the colonial system. At the moment when Cevallos made his
bitterest complaints, Bonaparte was least disposed to resent them by
war. Both parties knew that so far as Louisiana was concerned, the
act was done and could not be undone; that France was bound to
carry out her pledge, or the United States would take possession of
Louisiana without her aid. Bonaparte was willing to go far in the way
of conciliation, if Spain would consent to withdraw her protest.
Of this the American negotiators knew little. Through such
complications, of which Bonaparte alone understood the secret, the
Americans moved more or less blindly, not knowing enemies from
friends. The only public man who seemed ever to understand
Napoleon’s methods was Pozzo di Borgo, whose ways of thought
belonged to the island society in which both had grown to manhood;
and Monroe was not skilled in the diplomacy of Pozzo, or even of
Godoy. Throughout life, Monroe was greatly under the influence of
other men. He came to Paris almost a stranger to its new society, for
his only relations of friendship had been with the republicans, most
of whom Bonaparte had sent to Cayenne. He found Livingston
master of the situation, and wisely interfered in no way with what
Livingston did. The treaty was no sooner signed than he showed his
readiness to follow Livingston further, without regard to
embarrassments which might result.
When Livingston set his name to the treaty of cession, May 2,
1803, he was aware of the immense importance of the act. He rose
and shook hands with Monroe and Marbois. “We have lived long,”
said he; “but this is the noblest work of our lives.” This was said by
the man who in the Continental Congress had been a member of the
committee appointed to draft the Declaration of Independence; and it
was said to Monroe, who had been assured only three months
before, by President Jefferson of the grandeur of his destinies in
words he could hardly have forgotten:[55] “Some men are born for
the public. Nature, by fitting them for the service of the human race
on a broad scale, has stamped them with the evidences of her
destination and their duty.” Monroe was born for the public, and
knew what destiny lay before him; while in Livingston’s mind New
York had thenceforward a candidate for the Presidency whose
claims were better than Monroe’s. In the cup of triumph of which
these two men then drank deep, was yet one drop of acid. They had
been sent to buy the Floridas and New Orleans. They had bought
New Orleans; but instead of Florida, so much wanted by the
Southern people, they had paid ten or twelve million dollars for the
west bank of the Mississippi. The negotiators were annoyed to think
that having been sent to buy the east bank of the Mississippi, they
had bought the west bank instead; that the Floridas were not a part
of their purchase. Livingston especially felt the disappointment, and
looked about him for some way to retrieve it.
Hardly was the treaty signed, when Livingston found what he
sought. He discovered that France had actually bought West Florida
without knowing it, and had sold it to the United States without being
paid for it. This theory, which seemed at first sight preposterous,
became a fixed idea in Livingston’s mind. He knew that West Florida
had not been included by Spain in the retrocession, but that on the
contrary Charles IV. had repeatedly, obstinately, and almost publicly
rejected Bonaparte’s tempting bids for that province. Livingston’s
own argument for the cession of Louisiana had chiefly rested on this
knowledge, and on the theory that without Mobile New Orleans was
worthless. He recounted this to Madison in the same letter which
announced Talleyrand’s offer to sell:[56]—
“I have used every exertion with the Spanish Ambassador and
Lord Whitworth to prevent the transfer of the Floridas, ... and unless
they [the French] get Florida, I have convinced them that Louisiana is
worth little.”
In the preceding year one of the French ministers had applied to
Livingston “to know what we understand in America by Louisiana;”
and Livingston’s answer was on record in the State Department at
Washington:[57] “Since the possession of the Floridas by Britain and
the treaty of 1762, I think there can be no doubt as to the precise
meaning of the terms.” He had himself drafted an article which he
tried to insert in Marbois’s projet, pledging the First Consul to
interpose his good offices with the King of Spain to obtain the
country east of the Mississippi. As late as May 12, Livingston wrote
to Madison:[58] “I am satisfied that ... if they [the French] could have
concluded with Spain, we should also have had West Florida.” In his
next letter, only a week afterward, he insisted that West Florida was
his:[59]—
 “Now, sir, the sum of this business is to recommend to you in the
strongest terms, after having obtained the possession that the French
commissary will give you, to insist upon this as a part of your right,
and to take possession at all events to the River Perdido. I pledge
myself that your right is good.”
The reasoning on which he rested this change of opinion was in
substance the following: France had, in early days, owned nearly all
the North American continent, and her province of Louisiana had
then included Ohio and the watercourses between the Lakes and the
Gulf, as well as West Florida, or a part of it. This possession lasted
until the treaty of peace, Nov. 3, 1762, when France ceded to
England not only Canada, but also Florida and all other possessions
east of the Mississippi, except the Island of New Orleans. Then West
Florida by treaty first received its modern boundary at the Iberville.
On the same day France further ceded to Spain the Island of New
Orleans and all Louisiana west of the Mississippi. Not a foot of the
vast French possessions on the continent of North America
remained in the hands of the King of France; they were divided
between England and Spain.
The retrocession of 1800 was made on the understanding that it
referred to this cession of 1762. The province of Louisiana which had
been ceded was retro-ceded, with its treaty-boundary at the Iberville.
Livingston knew that the understanding between France and Spain
was complete; yet on examination he found that it had not been
expressed in words so clearly but that these words could be made to
bear a different meaning. Louisiana was retroceded, he perceived,
“with the same extent that it now has in the hands of Spain, and that
it had when France possessed it, and such as it should be according
to the treaties subsequently entered into between Spain and other
States.” When France possessed Louisiana it included Ohio and
West Florida: no one could deny that West Florida was in the hands
of Spain; therefore Bonaparte, in the absence of negative proof,
might have claimed West Florida, if he had been acute enough to
know his own rights, or willing to offend Spain,—and as all
Bonaparte’s rights were vested in the United States, President
Jefferson was at liberty to avail himself of them.
 The ingenuity of Livingston’s idea was not to be disputed; and as
a ground for a war of conquest it was as good as some of the claims
which Bonaparte made the world respect. As a diplomatic weapon,
backed as Napoleon would have backed it by a hundred thousand
soldiers, it was as effective an instrument as though it had every
attribute of morality and good faith; and all it wanted, as against
Spain, was the approval of Bonaparte. Livingston hoped that after
the proof of friendship which Bonaparte had already given in selling
Louisiana to the United States, he might without insuperable difficulty
be induced to grant this favor. Both Marbois and Talleyrand, under
the First Consul’s express orders, led him on. Marbois did not deny
that Mobile might lie in Louisiana, and Talleyrand positively denied
knowledge that Laussat’s instructions contained a definition of
boundaries. Bonaparte stood behind both these agents, telling them
that if an obscurity did not exist about the boundary they should
make one. Talleyrand went so far as to encourage the pretensions
which Livingston hinted: “You have made a noble bargain for
yourselves,” said he, “and I suppose you will make the most of it.”
This was said at the time when Bonaparte was still intent on
punishing Spain.
Livingston found no difficulty in convincing Monroe that they had
bought Florida as well as Louisiana.[60]
“We consider ourselves so strongly founded in this conclusion, that
we are of opinion the United States should act on it in all the
measures relative to Louisiana in the same manner as if West Florida
was comprised within the Island of New Orleans, or lay to the west of
the River Iberville.”

Livingston expected that “a little force,”[61] as he expressed

himself, might be necessary.
“After the explanations that have been given here, you need
apprehend nothing from a decisive measure; your minister here and at
Madrid can support your claim, and the time is peculiarly favorable to
enable you to do it without the smallest risk at home.... The moment is
so favorable for taking possession of that country that I hope it has not
been neglected, even though a little force should be necessary to
effect it. Your minister must find the means to justify it.”
 A little violence added to a little diplomacy would answer the
purpose. To use the words which “Aristides” Van Ness was soon to
utter with striking effect, the United States ministers to France
“practised with unlimited success upon the Livingston maxim,—
‘Rem facias, rem
Si possis recte; si non, quocunque modo, rem.’”
 CHAPTER IV.
In the excitement of this rapid and half-understood foreign drama,
domestic affairs seemed tame to the American people, who were
busied only with the routine of daily life. They had set their
democratic house in order. So short and easy was the task, that the
work of a single year finished it. When the President was about to
meet Congress for the second time, he had no new measures to
offer.[62] “The path we have to pursue is so quiet that we have
nothing scarcely to propose to our legislature.” The session was too
short for severe labor. A quorum was not made until the middle of
December, 1802; the Seventh Congress expired March 4, 1803. Of
these ten weeks, a large part was consumed in discussions of
Morales’s proclamation and Bonaparte’s scheme of colonizing
Louisiana.
On one plea the ruling party relied as an excuse for inactivity and
as a defence against attack. Their enemies had said and believed
that the democrats possessed neither virtue nor ability enough to
carry on the government; but after eighteen months of trial, as the
year 1803 began, the most severe Federalist could not with truth
assert that the country had yet suffered in material welfare from the
change. Although the peace in Europe, after October, 1801, checked
the shipping interests of America, and although France and Spain,
returning to the strictness of their colonial system, drove the
American flag from their harbors in the Antilles, yet Gallatin at the
close of the first year of peace was able to tell Congress[63] that the
customs revenue, which he had estimated twelve months before at
$9,500,000, had brought into the Treasury $12,280,000, or much
more than had ever before been realized in a single year from all
sources of revenue united. That the Secretary of the Treasury should
miscalculate by one third the product of his own taxes was strange;
but Gallatin liked to measure the future, not by a probable mean, but
by its lowest possible extreme, and his chief aim was to check
extravagance in appropriations for objects which he thought bad. His
caution increased the popular effect of his success. Opposition