The Theory and History Of Free Trade; Application To The Present
Not many people know that Adam Smith’s primary target in The Wealth of Nations was Mercantilism, the reigning economic theory of the time. He called his book “an attack on the whole commercial system of modern Europe”.
Mercantilism was focused on the balance of trade. Because it thought that wealth was money, Mercantilism recommended exporting more than you imported to create a positive balance of trade thereby increasing the stock of money and wealth of the country.
Adam Smith took issue with the Mercantilists definition of wealth. Wealth wasn’t money, which is only a medium of exchange. Wealth is the “annual produce” of a country, “the necessities, comforts and conveniences of life”. Wealth is the goods we consume that fuel our quality of life. Money is only useful because it can be exchanged for goods.
Using this definition of wealth, Smith showed that free trade, not a positive balance of trade, increased wealth for everyone. David Ricardo furthered this argument in 1817 with his concept of Comparative Advantage. Wealth is created by cooperation, specialization and division of labor across the widest possible market to maximize productivity and free trade, not by hoarding money.
The repeal of the Corn Laws in England in 1846, led by John Bright and Richard Cobden, was the ultimate fruit of Smith and Ricardo’s analysis. The Corn Laws restricted the importation of grain from outside of England, keeping prices high for the landowning British Aristocracy while at the same squeezing the laboring classes who had to pay those higher prices for food.
The Smoot-Hawley Tariffs of 1930 were an instance of Mercantilism that once again backfired and exacerbated The Great Depression.
Which brings us to the present. President Trump’s reciprocal tariffs are founded in Mercantilism. He wants things made in the US and exported to the rest of the world, creating a positive balance of trade. He is concerned about the Current Account Deficit, which reached $1.1 trillion in 2024. We are importing way more goods than we are exporting.
The economics, politics and sociology are complicated. I’m not going to pretend otherwise. As I said yesterday in “Shades of 1929”, the American middle class has been hollowed out by the exporting of jobs to Asia, primarily China, over the last few decades. That loss of jobs has led to a host of sociological problems in the heartland including the Opioid Crisis and rising “Deaths of Despair”. Vice President Vance wrote about this in his memoir Hillbilly Elegy and I sympathize with the administration’s desire to do something about this problem.
The problem with the tariffs is that they’re too radical. Corporate supply chains are now global. To move more of it back to the United States takes time. It takes years to build a factory. And the fact that these tariffs may not exist in a few years creates enormous uncertainty for corporate executives in making these decisions. The level of uncertainty will put a damper on business investment, not shift it toward the US as President Trump seems to believe.
The end result will be chaos and a large overall decrease in production resulting in a global recession. The problems President Trump is trying to address are real and serious. Many Americans are struggling both financially and spiritually – and the two are not unconnected. Bringing jobs back to America would help. But the size of the tariffs (54% of China, for example) and that they go into effect in one week will end up paralyzing the global economy and throwing it into recession rather than bringing a lot of jobs back to the US.
The widening of the market via globalization over the last two hundred years which has vastly improved productivity and economic growth will contract. Each country will turn inward, put up barriers to imports and focus on production for domestic consumption rather than doing what they do best because they can trade. Productivity will decline with the contraction of the size of the market and the economy will as well.