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Adam Smith: A Case For Free Trade

di Erik Marangoni - 9 gennaio 2003

In recent days there has been a growing dissent over the impact of free trade on a nation's wealth. Critics FROM all political parties argue that free trade has negative influences on the living stadards of peoples, that it harms the economic and social conditions of the countries affected. Hence there is a growing protest against everything that "smells" of free trade, FROM economic theories to international organizations.

The aim of this brief essay is to demonstrate, through the works of Adam Smith, that international trade is on the whole economically more beneficial than protection.

First of all we have to give a proper definition of free trade. It means that there are no artificial obstacles to the exchange of goods among national markets; hence, the prices people pay for purchasing goods are determined by the world market thus reflecting the relative scarcity and abundance of those goods. By contrast, protection indicates a situation in which political authorities introduce restrictions of different kinds to enable national producers to improve the national production of goods, at the expenses of the imported goods. These restrictions distort the system of prices as determined by the world market.

Adam Smith was the first that expressed his support for free trade, against the protectionist (mercantilist) theories, in the eighteenth century. His masterpiece "An Inquiry INTO the nature and Causes of the Wealth of Nations" was published in 1776, when the mercantilist theories had already reached their peak. Adam Smith's position towards free trade is mainly discussed in Book IV.

As a first step Adam Smith briefly examines the mercantilist approach to free trade. The mercantilists aim at restraining national importation while encouraging exportation abroad. By doing so, the country will enrich because occupation will grow in the protected sector an so will its amounts of gold (used to pay the international transactions). Adam Smith strongly opposes the mercantilist's position; it is no longer sufficient to defend an import tariff because of its effects on the amounts of gold and occupation; it is necessary to investigate INTO the effects that an import tariff has on the real value of a country's national income.

According to Smith, an import tariff diminishes competition and gives national goods a monopoly of the market, so that the prices consumers pay are higher than those existing at the world market:

"That this monopoly of the home- market frequently gives great encouragement to that particular species of industry which enjoys it, and frequently turns towards that employment a greater share of both the labour and stock of the society than would otherwise have gone to it, cannot be doubted. But whether it tends either to increase that general industry of the society, or to give it the most advantageous direction, is not, perhaps, altogether so evident. "

Smith was convinced that free trade had a positive impact on the real income of the society. This income was determined partly by the endeavours of the individuals. In the pursuit of their own interests, to their own advantage, individuals create wealth for the whole society:

"Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society, which he has in view. But the study of his own advantage naturally, or rather necessary, leads him to prefer that employment which is most advantageous to the society. "

Again:

"As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote t. I have never known much good done by those who affected to trade for the public good. "

As a consequence, the individuals must be granted freedom to promote their own interests, thus operating in a free world market, providing services and goods. In doing so a natural efficient reallocation of resources will emerge, FROM which the society as a whole will benefit.

Critics of Adam Smith often argue that his positions adhere to the most extreme laissez- faire doctrine. Yet, it is not completely true. Although in Smith's theories political authoritiesould avoid invading the market, in some cases their intervention is necessary. Political authorities should provide those facilities, such as a system of justice and law as well as certain public goods, that make the market work better.

In Adam Smith's mind free trade is good for the wealth of a nation because it permits the best allocation of resources, in that cheaper goods are imported FROM abroad whereas the country will specialize in the production of those goods that it produces more efficiently. At the same time, protectionism reduces national income:

"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. .. It is certainly not employed to the greatest advantage, when it is thus directed towards an object which it can buy cheaper than it can make. The value of its annual produce is certainly more or less diminished, when it is thus turned away FROM producing commodities evidently of more value than the commodity which it is directed to prooduce. According to the supposition, that commodity could be purchased FROM foreign countries cheaper than it can be made at home. It could, therefore, have been purchased with a part only of the price of the commodities, or, what is the same thing, with a part only oof the price of the commodities, which the industry employe by an equal capital, would have produced at home, had it been left to follow its natural course. The industry of the country, therefore, is thus turned away FROM a more, to a less advantageous employment, and the exchangeable value of its annual produce, instead of being increased, accordin to the intention of the lawgiver, must necessarily be diminished by every such regulation. "

Protectionism reduces the national income in that it interferes with the best allocation of resources, reduces the extension of the market and doesn't permit an appropriate division of labor.

Adam Smith also attacked the "balance-of-trade-motive", that governments often used to justify the introduction of import tariffs:

"There is no commercial country in Europe of which the approaching ruin has not frequently been foretold by the pretended doctors of this system, FROM an unfavourable balance of trade. .......it does not appear that any one nation in Europe has been in any respect impoverished by this cause. Every town and country, on the contrary, in proportion as they have opened their ports to all nations; instead of being ruined by this free trade. ....have been enriched by it. "

Smith accepted two situations in which the imposition of import tariffs were justifiable; the first was when the protection of a certain industry was necessary for the defence of the country; the other was when the country's goods were subject to taxes not imposed on foreign goods. In this case, the country had to impose tariffs to defend its production FROM foreign incorrect competition.

The introduction of a free- market system could introduce a dangerous distribution of domestic labor and capital that could provoke unemployment and a (temporary) reduction of the national income. For this reason, freedom of trade should be introduced gradually.

"The aim of mercantilist regulations is to extend our own manufactures, not by their improvement, but by the depression of those of all our neighbours, and by putting an end, as much as possible, to the troublesome competition of such odious and disagreeable rivals. "

And again:

". ..consumption is the sole end and purpose of all production; and the interests of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer. .. But in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production and not consumption, as the ultimate end and object of all industry and commerce. In the restraints upon the importation of all foreign commodities which can come INTO competition with those of our own growth, or manufacture, the interest of the home- consumer is evidently sacrificed to that of the producer. "

	Erik Marangoni