George Alogoskoufis

This article is adapted from an article originally written in Greek for the newspaper Ta Nea, on February 15, 2005.

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Adam Smith, the 18th-century thinker and author of The Wealth of Nations, the foundational book of economics, was a strong advocate of free trade and opposed the tariffs and protectionist policies advocated by the mercantilists.

Adam Smith believed that countries should specialize in what they produce best and trade freely with each other. In his own words, ‘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… 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.’ (Wealth of Nations, Book IV, Chapter II).

This idea, which was refined in the early 19th century by his spiritual successor David Ricardo as the principle of comparative advantage, has since become a fundamental principle of economics in matters of international trade. If there is one thing on which modern economists are almost unanimous, it is the need for international trade to be as free as possible.

Tariffs were considered by Adam Smith to be highly inefficient for a number of reasons:

First, because they disrupt the free determination of prices and the flow of goods and services and prevent the ‘invisible hand’ from effectively guiding markets.

Second, because tariffs benefit a limited group of domestic producers of goods and services that compete with imports, at the expense of consumers overall and exporting businesses.

Third, because tariffs encourage retaliation and trade wars, damaging international trade and the global economy as a whole.

Fourth, because tariffs usually protect inefficient economic sectors from competition and lead to overall inefficiency and stagnation.

In Smith’s words, ‘The interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer. But to give the monopoly of the home-market to the produce of domestic industry, in any particular art or manufacture, is in some measure to direct private people in what manner they ought to employ their capitals, and must, in almost all cases, be either a useless or a hurtful regulation.’ (The Wealth of Nations, Book IV, Chapter II).

However, Adam Smith recognized some cases where protection and tariffs may be justified. Such cases were related to national security and essential industries, temporary support of ‘infant’ industries and retaliation for unfair trade practices by a country’s competitors.

On national defense and the protection of essential industries Smith wrote ‘The defense of Great Britain depends very much upon the number of its sailors and shipping. The Act of Navigation, therefore, very properly endeavors to give the sailors and shipping of Great Britain the monopoly of the trade of their own country.’ (Wealth of Nations, Book IV, Chapter II).

On ‘infant’ industries, Smith suggested that trade liberalization should be gradual, so as to avoid disrupting the growth of domestic industries. ‘Humanity may, in this case, require that the freedom of trade should be restored only by slow gradations, and with a good deal of reserve and circumspection.’ (Wealth of Nations, Book IV, Chapter II).

On retaliation against unfair foreign trade restrictions he wrote, ‘To impose such duties and prohibitions, therefore, may, upon some occasions, be a matter of deliberation. Retaliation of this kind, though it may not always be prudent, may sometimes be an act of policy.’ (Wealth of Nations, Book IV, Chapter II). 

Trump often cites national security, protection of essential industries and unfair competition (especially from China) as reasons for his tariffs. Consequently, Adam Smith’s criticism of his policy would be harsh but would probably stop short of outright rejection.

In order to rationalize his tariff policies, Donald Trump uses arguments, many of which challenge the prevailing economic thinking, which is largely based on Adam Smith’s ideas. His justifications generally fall into five broad categories:

1. Reducing trade deficits: Trump argues that trade deficits mean America is “losing out” on global trade, something which tariffs will correct by reducing those deficits. Most modern economists, however, reject this view, as trade deficits are influenced more by macroeconomic factors that affect the balance of savings and investment in an economy, such as interest rates, rather than by trade policy. In Smith’s own condemnation of mercantilism, ‘”Nothing, however, can be more absurd than this whole doctrine of the balance of trade.’, (Wealth of Nations, Book IV, Chapter III).

2. Protecting American manufacturing and jobs: Trump argues that past trade policies (such as NAFTA and China’s entry into the WTO) have led to job losses in American manufacturing, which his tariffs will reverse. His critics counter that while tariffs may temporarily protect some jobs, they also raise costs for import-dependent businesses and disrupt global supply chains, leading to job losses elsewhere.

3. Punishment of China for unfair trade practices such as intellectual property theft, forced technology transfers, and illegal subsidies. While many economists agree that China engages in unfair trade practices, most view tariffs as a blunt tool that hurts U.S. businesses and consumers as much as it hurts China.

4. National Security Grounds: Trump justifies the tariffs on steel and aluminum as necessary for national security, arguing that the U.S. needs a robust domestic supply of these materials in the event of war or geopolitical conflict. Many are skeptical of this reasoning, viewing it as preposterous.

5. Strengthening America’s bargaining position: Trump sees tariffs as a bargaining tool to force other countries like China into better trade deals. However, his critics argue that while this tactic may work in business deals, it has failed in global trade, leading to retaliation from other countries and disruptive trade wars.

While Trump claims that the tariffs he imposed during his first term as President boosted U.S. manufacturing and brought back jobs, studies show that they have had mixed or negative results. Manufacturing job growth in the US has slowed, U.S. consumers and businesses have borne the cost of higher tariffs while farmers have been hit hard, requiring billions in government subsidies.

If Adam Smith had a say, he would on balance surely condemn Trump’s tariff policies, arguing that they ultimately harm US and global economic prosperity as well as the very producers and consumers they seek to help. In Smith’s words, ‘Commerce, which ought naturally to be, among nations, as among individuals, a bond of union and friendship, has become the most fertile source of discord and animosity.’ (Wealth of Nations, Book IV, Chapter III). One might add that, combined with his other policies, Donald Trump’s trade policies are dangerous not only for international prosperity but also for world peace.