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How to Enrich a Country: Free Trade or Protectionism?

One of the most pressing choices facing modern economies

is whether to adopt

a policy of free trade

or of protectionism,

that is, whether to encourage

foreign goods into the country with

minimum tariffs

and allow industries to relocate abroad;

or whether to make it hard for foreign firms

to sell their goods internally

and discourage domestic producers

tempted by cheaper wages in other lands.

It feels like a very modern dilemma,

but the debates between proponents of free trade

and protectionism

go back a very long way.

The argument began in earnest in Europe in the 15th century

with the formulation of a theory

known as mercantilism

the forerunner of what we today

refer to as protectionism.

Mercantilism was, like nearly every economic theory

interested in increasing a nation’s wealth.

But, Mercantilists argued

that in order to grow richer,

a country had to try

to make as many things as possible

within its own borders

Nd reduce to an absolute minimum

any reliance on foreign imports.

The role of government

was to help local industries

by applying huge tariffs on imported goods

and discouraging foreign manufacturers

from competing with local players.

A strong country was one that knew how to

provide for itself

and could achieve almost total independence in trade

a goal known as

economic

economic autarky.

The philosophy of mercantilism reigned supreme

as the most persuasive theory of economics

until the 9th of March 1776

the publication date of possibly

the most important book

in the history of the modern world.

In 'An Inquiry into the Nature and Causes of the Wealth of Nations'

the Scottish philosopher and economist Adam Smith

attempted to dynamite

the intellectual underpinnings of mercantilism.

Smith argued that the best way for

any country to grow wealthy

was not to try to make everything by itself,

for no country could ever hope

to do well in every sector of an economy.

Smith observed,

that countries naturally had

different strengths in particular areas

Some were great at making wine,

others had talent in pottery,

others still might be experts at making lace

and it was on such strengths

that every country should focus.

This was an application

at the level of nations

of a theory we can understand well enough

at the level of individual life.

If someone has a natural aptitude

for accountancy,

it makes no sense for them to spend

a considerable part of each day

trying also to make cheese,

to sew their own trousers

or to learn to play violin sonatas.

Far better for the accountant,

cheese-maker,

tailor and violinist

to specialize in the areas in which

they each have the greatest advantage

and then trade with others to

satisfy their remaining needs.

As Smith noted:

“It is the maxim of every

prudent master of a family,

never to attempt to make at home

what it will cost him more

to make than to buy.”

Smith emphasized that if Britain could

produce woolen goods more cheaply

than Portugal

and if Portugal could produce

wine more cheaply than Britain,

then it would be beneficial to both parties

to exchange the product they

could make at a lower cost

for the one they could only make

at a higher cost.

The overall wealth of both countries

would rise as labor and capital

would always be optimally employed,

directed to those sectors

where native skill and opportunity

was at its greatest.

The job of the government

was to recognise sectors where

there was a national advantage,

assist in the education of the workforce,

but otherwise, reduce tariffs

as much as possible,

and step out of the way.

With astonishing speed,

Smith’s theory convinced most of the economic

and political classes of

north Western Europe.

In Britain, his ideas were

first put to a practical test

in relation to the primary foodstuff

of the nation:

corn.

Grain prices had, for many years,

been protected by government decrees.

Cheaper foreign grain had been kept out,

apparently in order to

protect jobs and national wealth.

But Smith’s ideas,

now driven forward by his foremost

disciple David Ricardo,

proposed that all tariffs on imported grain

protectionist measures known as

The Corn Laws

were in fact obstacles to economic growth.

After bitter debates in Parliament,

the laws were repealed in 1846.

The result demonstrated both

the advantages and incidental

costs of Smith’s ideas:

the price of corn dropped sharply,

food became cheaper

and everyone, especially

the working classes,

had a lot more spare money

to spend on other goods,

This, in turn

grew the overall size of the

British economy,

so that it significantly outperformed

all of its European counterparts.

But – and it was a very big but

large swathes of British agriculture

went to the wall.

Cheap imported corn, from

Canada and the United States,

destroyed farms

and ways of life that had persisted for centuries.

Smith’s theories were both correct

and, depending on where one was standing,

plainly agonizing.

An enduring problem for the undoubtedly very

sound arguments in favour of free trade

is that its human costs

have seldom been addressed

with sufficient passion

and ingenuity.

The cries of the dispossessed

have not been recognised for what they are:

threats to the entire stability

and moral dignity of a nation.

As has only gradually been realised,

the benefits of an open economy

can only properly bear fruit

if a series of steps are taken to mitigate

the attendant downsides.

Any nation committed to free trade

must tax the sectors of the economy

which have an advantage

and then use the money

to retrain those in the

sectors of the economy

with the gravest disadvantages

in relation to foreign competition.

Without such redirection of money and labor

a nation will become highly

unstable politically

thereby endangering

any progress that free trade has made.

Secondly, governments must enable

everyone in the economy

to find their own natural areas of strength;

which means high levels of investment in education

and a raft of measures to maximize social mobility.

Monopolistic behaviour by the rich

endangers the integrity of a free trade system

just as much as punitive import tariffs.

Intellectually, free trade has

undoubtedly won the argument.

When a Mexican worker can make a car

for eight dollars an hour,

whereas an American one

costs 58 dollars an hour,

it is clearly wise to allow Mexico

to do what it can do best,

whatever the effect on American car workers.

However, defenders of free trade

have been grossly negligent

when it comes to instituting

the political programs necessary

to support the efficient

operations of the system.

It has forgotten the pain

of the car workers,

the coal miners and the steel makers.

And, in democracies,

there has been a heavy price

to pay for this neglect,

in the form of the rise of a new

class of mercantilists,

who have successfully argued that

barriers must again increase,

that a country should try to make

everything within its own borders

to regain its greatness

and that cheap importers

are invariably the

destroyers of domestic jobs.

These arguments make no sense,

but so long as the proponents of free trade

fail properly to articulate a program

to remedy free trade’s operations,

whole nations will be seduced by the

easy promises of the mercantilists

and will suffer accordingly

until the distinctive wisdom

of Adam Smith can once more

reassert itself.