The strongest argument for “Free Trade” – commerce without controls or taxation at national borders – was made by Adam Smith in his book “The Wealth of Nations”. Smith argued that if trade was unrestrained, every nation would specialize in producing those goods it could make most cheaply, and buy those that others could make at lowest cost. In such a world all goods would be produced optimally, and everyone would benefit.
There is some truth in the argument, but the world is not a blank slate entirely subject to rational thinking. Several factors lead to other outcomes than Smith’s “ideal” economy:
- Trade is a major source of state revenue. Until the introduction of the income tax (1913), customs duties were the main source or U.S. Government revenue, just as in other countries, none of which was likely to destroy the foundation of its budgets.
- Perfect balance between imports and exports is rare. Exporting more than it imports makes a country richer, the opposite makes it poorer. There will be political pressure to reduce imports and promote exports, a policy known as mercantilism.
- There are differences in living standards between countries and regions, which affect production costs.
- The Wealth of Nations was published in 1776, year James Watt built his first two coal-fired steam engines, launching the Industrial Revolution.
Mechanized manufacturing would completely alter the economic universe Adam Smith knew.
In fact, even while Adam Smith wrote The Wealth of Nations Great Britain was a deeply mercantilist nation, and one of its weapons were the Navigation Acts which it imposed on the American Colonies.
The Acts basically required that any European products the Colonies purchased be routed through Britain for control and taxation. Furthermore they could only travel in British ships. This “handling, shipping and tax” arrangement not only provided Britain with substantial revenue, but also increased the cost of non-British goods. The extension of the Acts to imports of sugar and molasses from the Caribbean (1733) was a major source of Colonial discontent, ultimately leading to the Boston Tea Party.
After the Revolution the United States had to set up its own set of customs duties, as imports from Great Britain were decimating its industries. Alexander Hamilton drew up the first list of imports to be taxed, which Congress passed and Washington signed in 1789. This list became known as the Tariff and drawing it up became part of yearly budget discussions.
Hamilton preferred a high Tariff in order to protect and facilitate the growth of essential U.S. industries. So did U.S. manufacturers, backed by their workers who collected better wages than their counterparts in England. The general population wanted cheap goods, imported or not. Setting the Tariff then became an exercise in horse trading between various interest groups, with Congress attempting to satisfy every constituency while raising sufficient money for the federal budget.
In general the South – which exported cotton and imported manufactured goods – wanted a low tariff; the industrializing north preferred a high one. With growing Southern influence in the mid-19th century the Tariff was gradually lowered. The nascent Republican Party (1854) sensed the resulting dissatisfaction in Northern states and made high customs duties a major plank in its platform. In 1861 customs duties were substantially raised, both to finance the Civil War effort and to protect essential industries.
The high tariff wall was a boon to U.S. industrialization. The economy boomed, railroads were built, and domestic manufacturing took off. U.S. inventors created a steady stream of new devices and technologies while improvements in quality and process made American manufacturers the most efficient in the world. By the 1870’s American industries had lower costs than their British competitors and by 1900 U.S. industry was number one globally.
The Great Depression gave capitalism a bad name, and under the New Deal ‘free trade’ came back in fashion. In 1934, in apparent contradiction to Section 8 of the Constitution, Congress delegated to the Executive the right to negotiate trade deals with foreign nations, on the assumption that they would stimulate the economy. The assumption was wrong. Despite a series of trade deals the economy languished until revived by the massive industrial expansion of WWII.
Despite this failure, the “free trade” movement continued after the war. Under the General Agreement on Tariffs and Trade (GATT) there were several rounds of tariff reductions. In 1995 GATT morphed into the World Trade Organization (WTO), with the power to arbitrate trade disputes – a direct reduction of U.S. sovereignty.
Over the years the nation has vacillated between an export-led economy and a consumption-based (import-led) economy. When we promoted an export-led economy the nation prospered. Each time we promoted an import-led economy the nation became poorer.
We currently practice free trade, which promotes consumption and leads to an import-led economy. The post-industrial thinking underlying “free trade” says that we don’t need to manufacture things anymore – we can rely on a service sector and a financial sector to sustain our economy.
Free trade policies have failed us in the past and are failing us once again. The economy is shaky, household income stagnant at best, and jobs are scarce. Work force participation is the lowest in a generation, a record number are on some form of welfare and the national debt is skyrocketing
“Free trade” has done its job again.
Born in Poland, Jacek Popiel was educated in Africa, Canada, and the United States. He speaks five languages. His career spans military and international business development in the Soviet Union, Eastern and Western Europe, North America, and Japan. He is currently a freelance writer and political consultant.