England and Portugal, cloth and wine: evidence for comparative advantage or infant industry?

In 1703, the Methuen Treaty removed duties on the exchange of English cloth for Portuguese wine, the trade later immortalised by David Ricardo’s use of it to explain his theory of comparative advantage. While Ricardo described Portugal as productively superior in both goods, he showed how specialisation and trade could still produce a higher level of output and mutual benefits. Ever since, Ricardo’s theory has been used by neoclassical economists as a theoretical tool to assert the logic of free trade. However, a subset of political economists, including Friedrich List, deny that trade liberalisation is always good for growth. These scholars have re-historicised the exchange of English cloth for Portuguese wine, finding that the Methuen Treaty ruined Portugal’s domestic textile industry and left them with a “slow-growing export market for wine.”1 This paper examines historical accounts of the Methuen Treaty and Anglo-Portuguese trade to assess the accuracy of the mainstream and heterodox characterisations of Ricardo’s classic example. It uses articles from prominent 19th and 20th century British, Portuguese, and Brazilian historians to develop a coherent narrative of the circumstances that produced the Methuen Treaty. Ultimately, this paper finds that the treaty was one event in a series that impeded the growth of Portuguese domestic industry, inflated their trade deficit, and produced wealth for the English. This reveals how Ricardo’s theory obscures a very simple insight: that some specialisations are better than others.