Adam Smith’s Alleged “Exceptions” to a Policy of Unilateral Free Trade – Donald J. Boudreaux (03/11/2020)

If you wish to win greater support for a policy proposal, it’s useful to draw your audience’s attention to famous and respected historical figures who, were they still alive, would almost surely join you in supporting that position. For example, if you’re pressing for a policy of protective tariffs as a means of enriching the domestic economy, you help your cause by reminding people that among those in the past who’ve supported such tariffs are Alexander Hamilton, Henry Clay, and Abraham Lincoln.

But support even more powerful is available if you can find a famous and respected historical figure who, although well-known for holding ideological or political views quite the opposite of your own, nevertheless is on record as sharing your support for the particular policy proposal in question. It’s for this reason that opponents of more-open immigration never tire of quoting Milton Friedman’s (purported) claim that such immigration is inadvisable for a country with a welfare state. If even Milton Friedman – who is well-known for his great skepticism of government-imposed restrictions on peaceful activities – supported such a government restriction, then the case for that restriction must be especially strong, and those persons who nevertheless continue to oppose this restriction must be excessively stubborn or unusually benighted.

In this spirit, those who today oppose a policy of unilateral free trade frequently claim as an ally none other than Adam Smith. With a deserved reputation as a staunch defender of free markets generally, and of free trade especially, if even Adam Smith in fact carved out exceptions to his case for free trade, then today’s proponents of protectionism must have a near-ironclad case for their support of wide government discretion to impose protective tariffs and otherwise to affect international commercial arrangements.

Adam Smith, it is true, believed that there’s a necessary role in a free society for government. Also true is the observation that Smith acknowledged some exceptions to a policy of unilateral free trade. These utterly mundane facts, however, do not begin to support the conclusion that Smith was – or would be today – sympathetic to the pleas of protectionists.

While he admitted the possibility that circumstances could arise to justify a handful of limited exceptions to a policy of free trade, as I (and many others) read Smith, his presumption was clearly that a policy of unilateral free trade should be the default position and that justification for any deviation in practice from this policy must meet a high standard of persuasion.

Adam Smith’s Exceptions…

Smith’s soaring 1776 volume, An Inquiry Into the Nature and Causes of the Wealth of Nations (1776), is divided into five ‘Books.’ The crescendo of the entire work is reached in Book IV, titled “Of Systems of Political Oeconomy.” It’s in this part of The Wealth of Nations that Smith made his case most fully for a policy of unilateral free trade.

Part of Smith’s case for free trade is his explanation of how unimpeded trade across political borders works to the advantage of the masses of people of any nation whose government sticks to a policy of free trade regardless of the trade policies pursued by other governments. Another part of his case is an exposé of the fallacies at the heart of what Smith called “the mercantile system” and what we today call mercantilism.

Smith laid out the principal arguments made by mercantilists for protectionism and (it’s not too strong to say) intellectually pulverized each. Writing in October 1780 to Andreas Holt, Smith described his 1776 work as a “very violent attack upon” the mercantilist underpinnings of Great Britain’s trade policies.

No fair-minded person can read The Wealth of Nations as a whole, or even just Book IV, and come away doubting that Smith ardently championed a policy of unilateral free trade.

And yet there are those exceptions – four of them, on a typical reading – that Smith mentioned. These exceptions are, in the order in which Smith took them up, protective tariffs for purposes of (1) national security; (2) ensuring that imports are taxed by the home government no less than the home government taxes domestically produced goods and services that compete with imports; (3) pressuring foreign governments to reduce their tariffs; and (4) ensuring that workers in protected industries are not all hit suddenly and unexpectedly with the need to find new jobs.

What to make of these exceptions? Not much, actually.

… are notably limited

The first exception – national security – is not an economic exception at all. Yes, protective tariffs might be advisable in limited circumstances to maintain military readiness. But Smith was clear that such protection is a cost. Although security against foreign invasion is unquestionably important, protectionism carried out to further this security “is not favourable to foreign commerce, or to the opulence which can arise from it.”

The second exception – equalizing taxes – is also not really an exception. A policy of free trade is one in which the home government treats the sale and purchase of all goods and services identically, regardless of where they are produced. Smith argued that if the home government taxes the domestic production of some particular goods, then failure to impose identical taxes upon the sale of imports that compete with those domestically produced goods would give an artificial – and, hence, economically distorting – advantage to the imports.

The third exception – using at home what are now known as “retaliatory tariffs” in the hope of inducing tariff reductions abroad – is indeed a genuine exception. But no sooner did Smith mention this exception and its possible benefits than he cast doubt on its advisability. He called the typical government official who in practice would determine if retaliatory tariffs stand a good-enough prospect of working an “insidious and crafty animal.” Such a person is hardly the sort to be blithely trusted with power to obstruct trade. Furthermore, Smith thought it important to explicitly observe that the domestic citizens who bear the brunt of the very real costs of retaliatory tariffs are seldom the same domestic citizens who would benefit from any resulting reductions in tariffs by foreign governments.

The fourth exception – shielding workers in protected industries from sudden and unexpected economic disruption – is, like each of the first two ‘exceptions,’ not really one. Not only do such tariffs not promote industry and growth, these tariffs should be reduced until they are eventually eliminated. Fearful that too-quick and drastic liberalization of trade might unduly harm workers in protected industries, Smith was willing to tolerate the temporary continuation, but at falling rates, of some tariffs. Smith thought it to be a matter of justice to workers, despite any resulting reduced economic growth, for government to reduce existing tariffs gradually – tariffs that, Smith is clear, should never in the first place have been imposed.

One may agree or disagree with Smith on any or all of these so-called “exceptions.” But one cannot legitimately identify Smith’s own discussion of these “exceptions” as reason to doubt that he strongly believed that maximum widespread prosperity and justice over the long run are best ensured by a policy of unilateral free trade.

THIS ARTICLE ORIGINALLY POSTED HERE.



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