This chapter deals with treaties of commerce. As one would expect, Smith wants as few restrictions on trade as possible, and makes a good case.
Page 410: “A direct foreign trade of consumption is always more advantageous than a round-about one; and to bring the same value of foreign goods to the home market, requires a much smaller capital in the one way than in the other.” This brings up again the whole issue of whether transportation adds value, or whether, on the contrary, a portion of the surplus value must be used for transportation. It makes a difference because, in the latter case, transportation reduces profit. Smith is somewhat contradictory on the issue. It may be that it is different in different cases: If I must pay to transport my corn twenty miles to market, whereas another farmer need only transport his two miles to the same market, I cannot charge more for my corn simply because it went further, hence the transportation reduces my profit. Contrariwise, goods shipped from Japan to US markets must always have a certain markup compared to the price of the same item in Japan. Interesting question.
Assuming people make economically rational decisions, transportation increases value. How much is pizza at your house worth to you, compared to at the restaurant? (If you didn’t prefer it at your house, you wouldn’t get it delivered; so when it’s worth more at the restaurant, it doesn’t get transported.)
If your corn has to be transported 20 miles to reach the market, how much is it worth at your farm? If it isn’t worth at least the cost of transportation more at the market, then you don’t transport it there. (So, for instance, if your neighbor buys corn to manufacture breakfast cereal, it might be worth more at your farm, because transporting it from the market to your neighbor adds value.)
The comparison with the farmer 2 miles from the market proves nothing, because we don’t know the value of corn at his farm to begin with.
Of course, I’m using “value” to mean “market value” not some abstract “true value”.
“Contrariwise, goods shipped from Japan to US markets must always have a certain markup compared to the price of the same item in Japan.”
Oddly and non-intuitively, this is not necessarily true. Japan is saddled with many layers of middlemen and distributors serving individual small businesses, as opposed to the large retail operations in the US that self-distribute. The total of the Japanese middleman markups is frequently notably larger than the cost of transport to the US, which until the energy shock was extremely cheap. One can sometimes buy (and I have bought) some Japanese products more cheaply in the US than in Japan.
Let me add a post-script: my comment is on the specific example, not the general case. The general case does remain true in general, but it’s also true that specific situations can produce results opposite to expectations.
Or to put it another way: In theory, there’s no difference between theory and practice. In practice, there is.
Erik, while that is not the general case, it applies more widely than the single case. For instance, goods from countries with VAT that is refundable upon export will often cost less elsewhere, if the VAT is more than the cost of shipping plus the taxes upon importing and sale.