National Post (National Edition)
Trump knows his Adam Smith
The trade wars are continuing with U.S. President Donald Trump’s levy of tariffs this week on another US$200 billion in Chinese imports, as are condemnations from commentators of the left and right who slam Trump’s demand for fair and reciprocal trade as ignorant and unsophisticated.
Trump’s trade policies “ignore the foundational economic lessons of Adam Smith,” stated The Independent’s economics editor in an article that referred to Trump as a “crazed protectionist.” Earlier this month, Foreign Policy lamented Trump policies that are “in defiance of nearly 250 years of economic wisdom going back to Adam Smith,” and before that Nobelwinning economist Robert Shiller suggested Trump and other protectionists need to understand The Wealth of Nations, where “Adam Smith provided an eloquent and convincing argument for free trade, instead of trade distorted by tariffs.” A 2016 poll of economists found 100 per cent opposed to their take on Trump’s trade policies, some adding comments like “stupid” or “Read Adam Smith.”
It is these pundits and economists who should read — or reread in the case of those who actually read The Wealth of Nations — Adam Smith. They might also reread what Trump has actually been saying, rather than what they assume he’s saying. If they did, they would see that Trump has been following Smith’s playbook. No political leader anywhere in the world is truer to Adam Smith’s prescriptions for free trade.
Smith is correctly viewed as championing competition and free trade, and opposing monopolies and tariffs. But Smith, one of the most unconventional thinkers of his time, was not the two-dimensional capitalist he’s often taken for. He also championed the use of tariffs in precisely the ways that Trump employs them.
When a foreign country engages in unfair trade through the use of tariffs that harm domestic exporters, Smith argues, retaliation is called for whenever it can bring the foreign country to heel, despite the initial cost of a trade war: “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. The recovery of a great foreign market will generally more than compensate the transitory inconveniency of paying dearer during a short time for some sorts of goods.”
Trump has always pre- sented himself as a free trader, with the caveat — Smith’s caveat — that the trade also has to be fair. But whenever Trump proposed unlimited free trade, as he did at the June G7 meeting in Quebec, other leaders haven’t taken him up on it. In the absence of unlimited free trade — which Trump defines as radically as any libertarian, i.e., no tariffs, no non-tariff barriers and no subsidies — Trump has been willing to compromise by accepting reciprocal trade. Why should the EU be allowed to get away with placing tariffs of 10 per cent on U.S. cars, and China with adding 25 per cent, when the U.S. tariffs on automobiles from these countries is only 2.5 per cent, Trump argues. Smith’s ghost nods in agreement. “Revenge in this case naturally dictates retaliation,” writes Smith. To ensure fair competition between foreign and domestic industries, Smith likewise argues that “when some tax is imposed at home upon the produce of the latter… it seems reasonable that an equal tax should be imposed upon the like produce of the latter.”
Although Smith would agree with Trump’s retaliations, he also cautions that retaliations are more art than science, and that they will fail if the retaliator isn’t skilled in the art of the deal, and able to employ everchanging tactics. “To judge whether such retaliations are likely to produce such an effect does not, perhaps, belong so much to the science of a legislator, whose deliberations ought to be governed by general principles which are always the same, as to the skill of that insidious and crafty animal, vulgarly called a statesman or politician, whose councils are directed by the momentary fluctuations of affairs.”
When the negotiator is unlikely to win a trade war — as is the case with Canada’s NAFTA negotiators — retaliatory tariffs are counterproductive, Smith says, since they only compound the harm done by the initial tariffs. Smith’s advice on trade wars comes down to common sense: Fight a trade war for freer trade if you can win it; surrender immediately if you can’t. Trump is taking Smith’s advice; Prime Minister Justin Trudeau is not.
Smith champions nonretaliatory tariffs, too, “when some particular sort of industry is necessary for the defence of the country.” In Trump’s case, the industries necessary for the defence of America are steel and aluminum — without protection, they were about to disappear altogether. In Smith’s case, the industry needing protection on defence grounds was shipping. Great Britain’s Navigation Act heavily taxed, and in many cases prohibited, foreign ships from supplying Great Britain. Although Britain was not then at war, and although the prohibitions on shipping harmed the British economy, Smith believed “the act of navigation is, perhaps, the wisest of all the commercial regulations of England” since defence is “of much more importance than opulence.”
Adam Smith, Donald Trump and conventional economists of the left and right agree on the desirability of free trade. But only Adam Smith and Donald Trump agree that tariffs should be employed to secure national defence, and to win trade wars in furthering free trade. That explains why Trump’s trade policies make him such an outlier today, just as Adam Smith’s trade policies made him an outlier in his day.
SMITH CHAMPIONED THE USE OF TARIFFS IN PRECISELY THE WAYS TRUMP EMPLOYS THEM.