Adam Smith's Timeless Case for Free Trade
I would bet the nation’s future on Smith’s principles rather than Trump’s passions.
If you maintain that over time, the United States has been the best country at exemplifying the teachings of Adam Smith, you would get no argument from me.
Sadly, that imagined crown no longer fits. By one calculation, with President Trump’s new tariffs, the United States “is about to have the highest tariff rate of any advanced economy” with a rate of “around 22 percent — up from 1.5 percent in 2022.”
Smith’s teachings on markets and human nature established the foundation for a free trade policy. It would seem the fate of humanity is to forget timeless truths, endure the consequences, and struggle to recover those truths.
Timeless principles apply everywhere and always. Principles ensuring human flourishing are mutually beneficial, not zero-sum. Famously, Smith pointed us to the advantages of the “division of labour” and how, under conditions of freedom, our actions lead us to naturally become “mutually the servants of one another,” helping each other thrive.
We can assume tariff supporters have the best intentions, yet ultimately, intentions don’t matter. In his preface to the 1976 edition of The Road to Serfdom, FA Hayek warned that “unless we mend the principles of our policy, some very unpleasant consequences will follow which most of those who advocate these policies do not want.”
When we are out of alignment with the principles by which humanity flourishes, there are consequences. The more we are out of alignment, the more severe the consequences.
If the sirens’ call of protectionism is seducing you, perhaps it is time to review the clear teachings of Adam Smith in The Wealth of Nations. Regarding the outcome of President Trump’s new tariffs, I would bet the nation’s future on Smith’s principles rather than Trump’s passions.
Let’s begin with a statement of the purpose that drives human activity. Smith writes, “Every man is rich or poor according to the degree in which he can afford to enjoy the necessaries, conveniencies, and amusements of human life.”
To achieve the wealth we seek, we are almost 100 percent dependent on the efforts of others. Smith pointed out, “After the division of labour has once thoroughly taken place, it is but a very small part of these [necessaries, conveniencies, and amusements] with which a man’s own labour can supply him. The far greater part of them he must derive from the labour of other people.”
My wife dedicates a lot of time and energy to her vegetable garden. When we factor in her investments, the cost of homegrown food surpasses that bought at a farm stand or supermarket. Her devotion of time and energy is uncoerced — she gains much from gardening — and doesn’t violate Smith’s maxim: “Every prudent master of a family, never [attempts] to make at home what it will cost him more to make than to buy.”
Smith gives us clear examples: “The tailor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a tailor.”
Smith then generalizes the principle: “What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom.”
It is not merely domestic production that Smith referred to: “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.”
Smith used the example of the folly of growing wine in Scotland: “By means of glasses, hotbeds, and hotwalls, very good grapes can be raised in Scotland, and very good wine too can be made of them, at about thirty times the expense for which at least equally good can be brought from foreign countries.”
And then Smith asked the pertinent question: “Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and Burgundy in Scotland?”
He soundly answered no: “There would be a manifest absurdity in turning towards any employment thirty times more of the capital and industry of the country than would be necessary to purchase from foreign countries an equal quantity of the commodities wanted.”
Consider President Trump’s assertion that these tariffs are retaliatory measures to protect America from unfair trade practices. The President’s calculations are dubious, but let’s make the best case for his policies and suppose his calculations are correct.
Smith allows, “There may be good policy in retaliations of this kind, when there is a probability that they will procure the repeal of the high duties or prohibitions complained of.”
But what is the probability of that happening? Smith cautions that the likelihood of repeal depends on “the skill of that insidious and crafty animal, vulgarly called a statesman or politician.”
Skeptical of success, Smith argued that politicians “are directed by the momentary fluctuations of affairs.”
He added, “When there is no probability that any such repeal can be procured, it seems a bad method of compensating the injury done to certain classes of our people, to do another injury ourselves, not only to those classes, but to almost all the other classes of them.”
Those who love the well-being of this country hope the President is a free trader at heart and hope Trump will negotiate regional and then worldwide tariff reductions quickly. Smith wouldn’t bet on that.
In The Theory of Moral Sentiments, Smith cautioned against “The man of system, … very wise in his own conceit,… [who] seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board.”
And what about the moral side of the equation? Let’s set aside the charged issue of trade with China. Trump has imposed a 49 percent tariff on Cambodia and a 46 percent tariff on Vietnam. Both countries export a considerable amount of shoes and clothing to America. The higher prices will hurt American consumers, and Cambodia and Vietnam will suffer devastating economic consequences.
Does the President think Cambodian and Vietnamese workers have ripped us off? Or is it the factory owners? The Vietnamese government, for example, doesn’t trade with the American government. American businesses voluntarily trade with Cambodian and Vietnamese companies (often owned by foreign investors).
Free trade arguments will not sway the economically illiterate. Their faith in President Trump overshadows their understanding of Adam Smith’s economics and dulls their moral compass. We’re told that America’s interests must come first. Smith would say yes, let’s make America great, but trade, not tariffs, is a pathway to progress.
Though economics is called by some a dismal science, a truly dismal philosophy is that the world is a win-lose proposition, where one must beat others or be beaten.
In his The Theory of Moral Sentiments, Smith explained why our moral sense, rooted in sympathy for others, promotes mutual respect.
Smith began Moral Sentiments with this optimistic moral observation: “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.”
Prosperity in Cambodia and Vietnam should matter to Americans because of our shared humanity and also because it benefits us economically. Americans, Cambodians, and Vietnamese march in the same band, no different than Kansans and Iowans. We ignore Smith’s timeless teachings at the risk of our economic and moral well-being.
This essay was originally published at the American Institute for Economic Research.
Our study of Constructive Living begins May 3rd.
Great stuff Barry, as always, but especially worthwhile in today’s climate of non stop tariff talk.
It seems the only reason any two parties would trade with each other is that both believe they each benefit. Therefore, I have always been baffled that so many believe in the need for trade agreements. What for?
If one side of a potential transaction doesn’t benefit, they simply will not trade.
Now, perhaps a government might want to benefit certain businesses by reducing the competition to those businesses , but since there is always a trade-off, the cost of benefitting businesses is the harm done to consumers.
Businesses are not guaranteed any profits and must compete and earn whatever they can. Consumers should be able to buy whatever they want from whomever they want, and all government interventions reduce their ability to do so.
Barry, Is there any circumstance where Smith would approve of tariffs? I’m thinking of as leverage against unfair trade, labor and environmental practices by another country. If not, how might he propose dealing with it, or should it just be treated as factors in a consumer’s purchasing decision?