Trump’s signature trade policy was debunked by Adam Smith more than 200 years ago

Not impressed.
Not impressed.
Image: Wikimedia/Emma Ferrier
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Adam Smith, the influential 18th-century Scottish philosopher and economist, spent his life dismantling the theory of mercantilism. Centuries later, newly installed US president Donald Trump wants to bring it back.

From the 16th to the 18th century, most countries in Western Europe viewed international trade as a zero-sum game. Mercantilism, the belief that countries are more prosperous when they export more than they import, dominated political economic thought.

The intellectual maverick Smith argued in his seminal book The Wealth of Nations that trade is mutually beneficial when countries specialize in producing the goods they are best at making.

“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 employed in a way in which we have some advantage.”—Adam Smith

Smith’s argument, which was the genesis of the theory of comparative advantage, would eventually win over most of the world’s policymakers. Trump, however, does not subscribe to this view. A portion of his inaugural address was dedicated to celebrating the virtues of protectionism.

“We must protect our borders from the ravages of other countries making our products, stealing our companies, and destroying our jobs. Protection will lead to great prosperity and strength.”—Donald Trump

Trump’s administration is packed with mercantilists. Secretary of Commerce Wilbur Ross, US Trade Representative Robert Lighthizer, and head of the National Trade Council Peter Navarro are all skeptical of the mutual benefits of international trade. During the campaign, Navarro and Ross wrote a position paper in their capacity as advisers that was classically mercantilist, arguing that reducing imports will boost US wealth. Conservative economist David Henderson says the report shows “a mind-boggling misunderstanding of the effect of trade on GDP.”

Trump’s views on trade are summed up by his feelings about his country’s relationship with China. Although some sectors of the US economy have been harmed by increased trade with China, the US has also benefitted greatly from the low cost of consumer goods imported from China, and the opportunity to export to such a large and fast-growing market. Trump doesn’t see this as a fair exchange.

Smith stressed that trade makes consumers and businesses better off precisely because it is done out of self-interest. In Smith’s view, a “totally one-sided trade” cannot happen unless one actor has been coerced, although he acknowledges one side could benefit more than the other (while stressing that both are still better off than before).

“But that trade which, without force or constraint, is naturally and regularly carried on between any two places is always advantageous, though not always equally so, to both.”—Adam Smith

Although Trump has spent decades denigrating US trade agreements, he has repeatedly claimed to be a “free trader.” He believes, regardless of the party in power, the US has suffered primarily because inept people negotiated bad trade deals. Trump explained his view when he announced his candidacy in 2015.

“We used to have victories, but we don’t have them [anymore]. When was the last time anybody saw us beating, let’s say, China in a trade deal? They kill us. I beat China all the time. All the time… When did we beat Japan at anything? They send their cars over by the millions, and what do we do? When was the last time you saw a Chevrolet in Tokyo? It doesn’t exist, folks. They beat us all the time.”—Donald Trump

Over in Edinburgh, Adam Smith is rolling in his grave.