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Free trade: Adam Smith 1, Donald Trump 0

Business Maverick

BUSINESS MAVERICK ANALYSIS

Free trade: Adam Smith 1, Donald Trump 0

Portrait of the political economist and philosopher Adam Smith (1723-1790) by an unknown artist, which is known as the ‘Muir portrait’ after the family who once owned it. The portrait was probably painted posthumously, based on a medallion by James Tassie.. (Right) Donald J Trump, not a political economist nor a philosopher (EPA)
By Tim Cohen
12 Oct 2020 1

For students of modern political history, the French Revolution in 1789 represents a fundamental shift: among other things, it inaugurated the era of the rights of humans. But what would be a key date in economic history? Arguably, the publication of Adam Smith’s The Wealth of Nations, just a little earlier, in 1776.

The two events are not unrelated, even though one was dramatic, bloody and had enormous immediate repercussions, while the other was, well, a book. The book was academic, cerebral and generally ignored. Students of political history would presumably argue that the revolution was the more important event. Yet, Adam Smith laid the foundation for the modern economic era, and unleashed the intellectual power that underpinned capitalism and the greatest expansion of wealth the world has ever seen.

Tumultuous times two centuries ago

This period of history, between the Declaration of Independence by the US in 1776 and the Battle of Waterloo in 1815, includes some of the greatest intellectual and economic breakthroughs of all time. The Industrial Revolution, the Enlightenment, with its rejection of slavery and colonialism, the expansion of democracy and the rise of individualism all began in this tumultuous period. Some nations later descended into despotism, some tried communism. And yet, in the end, here we are. The ideas of the Enlightenment have broadly triumphed.

What is curious about this trajectory is how uneven it has been. The contradictions and peculiarities are rampant. Monarchies still exist, even if they are more symbolic than functional. The most avaricious capitalist country on the planet is run by a communist party. Dictatorships still pop up like weeds. The Enlightenment may have defeated all comers but keeps on failing to win the peace completely.

In the very modern era, nobody illustrates this better than US President Donald Trump. His detractors have many reasons to dislike him: his malignant narcissism, his pettiness, his dishonesty, his racism – you name it, it’s all there. Yet, there is an even greater reason to dislike him – he stands against Adam Smith.

Rethinking conventional wisdom

One of the many things Smith did was lay the foundations for the end of mercantilism and the rise of free trade between nations. Then, as now, it was assumed that the wealth of nations was a zero-sum game, that a gain by any country would constitute an equal and opposite loss for another. Smith argued that this idea was fallacious, and his successor, David Ricardo, showed why: free trade benefits both sides, even if one is less efficient or economically developed than the other. It’s such an astounding discovery and so counterintuitive that it is barely understood by politicians today, never mind the general populace.

The biggest weapon in the mercantilist armoury is the tariff, and we have seen a global proliferation of those over the past few years, mainly initiated by Trump.

For those who are bothering to notice, the tally is now in. How did all those egotistical battles with Mexico and China work out? Short answer: not so well.

As former World Bank chief economist Anne Krueger points out, when Trump entered office his aims were to reduce trade imbalances and remove or reduce barriers and tariffs against US goods, thereby increasing exports. “None of these goals has been achieved.”

The overall US trade deficit rose from $750-billion in 2016 to $864-billion in 2019, and is now at its widest since July 2008. US exports to China, the main target of Trump’s “America First” trade policy, rose by only 1.8% in the year to August 2020, while Chinese exports to the US rose by a whopping 20%, thereby increasing the bilateral trade deficit.

The Trans-Pacific Partnership, which Trump abandoned upon taking office, was reconstituted without the US as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. The remaining members now enjoy duty-free access to one another’s markets, while subjecting the US to higher tariffs. So, far from reducing the barriers faced by US exports, Trump has managed to increase them.

Oddly, I’m encouraged by these poor results from the US, because they demonstrate the truth of the arguments Smith and Ricardo were making three centuries ago. Ultimately, free trade will win, not because of Trump, but in spite of him. DM/BM

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  • Thanks to Tim Cohen, for a thought-provoking piece, invoking Adam Smith and David Ricardo, and their assertion that “free trade benefits both parties”. I believe that this is often, but not always, true. Smith and Ricardo outlined the three factors of economics: land, labour and capital, which even Karl Marx accepted as axiomatic. However, Adam Smith explained two other important factors, both dealing with access to land; in Britain before “enclosure” (privatisation of land by the barons), there had always been “common land” which could be used by all, to graze animals or to produce vegetables. Smith said that once all the common land had been fenced, two things would inevitably happen: first the employer would pay as little as he could get away with, and second, the landlord would charge as much as the market could bear. While there was still access to the commons, if you did not like the wages I offered, you could go off and become at least a subsistence farmer; once all land was enclosed, this option was not available.

    South Africa would do well to remember this in reflecting on free trade: it is only free with a level playing field. Our traditional tenure guarantees some access to tribal land, at least for families to produce food. In promoting free trade. let us not forget that access to land in a developmental state can bring about upward mobility of those who are prepared to work and able to meet the demands of the market.

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