I have written a few blogs on tariffs for Quadrant online and recently had a to and fro with a Roger Partridge who is the Chairman and senior fellow at the New Zealand Initiative. The New Zealand Initiative is a free-market think tank. Partridge describes himself as a Classical Liberal. All of this seems fine, more strength to them. However, as with Libertarians, Classical Liberals have a hang-up about free international trade.
My own views have altered. I used to be a free trader. Then again, I used to be on the left of the political spectrum. One sees the light, if one is fortunate. Old lefties are full of the silly ideas of their youth without the excuse of being youthful. It is pitiable really, if it wasn’t so tragic. And corrupting and damaging too, if they gain positions of influence. Anyway, back to trade.
It is not hard to describe the battlelines. Free traders trace their views back to economists such as Adam Smith, Frédéric Bastiat, John Stuart Mill, and David Ricardo. All names to conjure with. Ricardo developed the theory of comparative advantage which showed that trade was generally beneficial between two countries even when one was more efficient at producing all tradeable goods. “The most beautiful result in all of economics,” was how one contributor to the New Palgrave Dictionary of Economics described it.
Overall world production tends to be optimised when countries specialise in what they do relatively best, export their surplus production, and import what they need. Potentially, all countries can become better off. Tariffs get in the way; as, it should be clearly noted, do subsidies of one kind or another.
But – and it’s a big but – national life isn’t just about increasing prosperity, as important as that is. Among other things, it is about culture enriched by industrial diversity, and it is about security of supplies. Taken to a limit, free trade might mean that a country specialises in just one tradeable good and imports the rest. Of course that limit is unlikely ever to be reached. However, a country can be left with a very pared down manufacturing sector. Think of Australia and think of planes, ships, trains, buses, cars, white goods, electronics, clothing, footwear, toys, tools, medicines and so on into building materials like plate glass. All mostly imported. At some point, it is legitimate to ask whether untrammelled trade is too costly culturally and, also, in terms of national security, even if it brings monetary benefits.
When it comes to America the question is particularly pertinent due to its role of being the principal military defender of the West. America currently imports almost half of its aluminium supplies and is the biggest importer of steel. That might be costly if ever it came to war. As would its reliance on overseas supplies of medicines and medical equipment. Now when you put a mercantilist, unprincipled, growing military power into the mix, namely China, the plot thickens. What price free trade when it weakens America and strengthens China?
Personally, I believe that those who argue in support of free trade live out their theory in a world which possibly existed in the nineteenth century but exists no longer. They have a blinkered view. Oblivious to everything that matters except money. Trump is right in trying to restore traditional manufacturing in America. He is right in trying to make America much more self-sufficient in strategic materials and goods. He is right that a massive US trade deficit of USD1.2 trillion in 2024 is indicative of something going badly wrong. And he is right that import duties (effectively, the 10 percent tariff) might help reduce the unsustainable US budget deficit.
Whether his approach is without fault is another question. But critics should consider the fact that the house is on fire and not only is he is the only one doing something to put it out he is the only one with the guts to try to put it out. Constructive criticisms, fine. But booing and heckling from the sidelines is unbecoming.
Talking about unbecoming, reportedly Richard Branson said, “Mr Trump’s erratic policymaking had shattered business confidence…many Americans I know are very sad.” Hmm? How many American factory workers and coal miners does Branson know? Just wonderin’.
Great commentary, Peter.
Thank you for that.
I subscribe to ‘Open Trade’ whereby everyone knows the hidden costs.
I wonder how many Australians know how much they benefit from slavery in China and other countries.
Yes. Adam Smith et al. considered only the financial aspect and ignored all other factors. There are many. Much the same arguments go for open borders.
Time to put Adam Smith to bed.
His theories have proved wrong, in detail and over all.
On Agricultural imports:
Adam Smith did not foresee refrigerated transport, nor that the UK would import beef and lamb from the antipodes.
Adam Smith was unable to foresee favourable nation status for China and free shipping:
Could not foresee the EU, butter mountains, French farmers or dumping:
Was incapable of conceiving that Britain would not, one day, rule the waves, or that 20th century free traders would be so stupid as to not exempt defence from their stupid theories based on his work, could not comprehend that the UK would one day be supplied by shipping under flags of convenience:
Adam Smith lived in a time when it was inconceivable that Britain would lose naval dominance, or that Britons would allow their defence to slide into disrepair.
He lived at the height of industrialisation and his insights were for that time, and contained many oversights, as well as many cautions or assumptions that modern free traders ignore. He was neither the pureist they imagine, nor in a position to predict the future of trade.
Another thing that those quoting Smith ignore is that at that time revenue was taxes on goods. Smith wasn’t claiming that there should be no taxes on imports, only that they shouldn’t be used to build monopolies at home. Given that revenues came from taxes on goods and granting monopolies on certain trades, (there were no income taxes) Smith is not to be taken as making the argument for unfettered free trade as modern free traders think of it.
Adam Smith wasn’t an absolutist free trader.
He acknowledged that there were national interests that needed protection.
That’s something his 1980s (and subsequent) political devotees – who probably never read him – overlooked.
Bit harsh re Adam Smith not predicting those things. The principle still stands in general. If not meant to be literal, die in the ditch principle.
as for the butter mountains and the like, seeing as they are purely the result of tariffs, subsidies and quotas, I think they rather prove Smith I would have thought.
I’m sorry you’ve moved away from free trade and become a protectionist, Peter. I guess what used to be fashionable no longer is.
Consider the current state of Australia. We’ve imposed energy policies that, over the past three years or so, have seen electricity prices rise by more than 40%. Our labor markets are completely constipated and immune to any sort of reform.
You may be prepared to pay $50 for a pair of Australian-made socks, but I’m not.
De-industrialization didn’t occur solely because of cheaper wages elsewhere.
Liberalize the labor, energy, and real estate markets, and things will be made here again. Until that happens, nothing will work—not even protectionism.
All protectionism would do is force capital allocation to sectors with a lower ROI and will bring forward lower living standards.
Energy is the most important thing that the left/green ideologues have stuffed up. Given time they will do the same to mining and agriculture.
“Liberalize the labour, energy, and real estate markets, and things will be made here again. Until that happens, nothing will work—not even protectionism.”
Yes, JC, you make a good point. However, it is hard to compete with nations with cheap labour, which pinch IP, which subsidise their export industries, and which intervene to keep the value of their currencies low. The US has freer labour markets than Australia and cheaper energy yet finds itself unable to compete; hence, for example, a USD300 billion trade deficit with China. It is because of this that I am in favour of targeted tariffs (or rebalancing trade deals), but not to a level which would mean your socks would cost $50.
That said, I agree with you that freeing the labour market and reducing energy costs – by going right back to coal and gas – is key to our competitiveness, inside or outside modest levels of protection. But I think we need both when faced with manufacturing competition from China and India and other so-called less developed nations. Chinese manufacturing imports into Australia have increased sharply in recent years. When I am shopping, I try to find something that isn’t made in China. It gets harder and harder.
Peter,
China’s approach to trade is not characterized by free trade but rather by hostile practices, warranting significant sanctions. However, shifting entirely toward extreme protectionism is not the solution. The United States is justified in sanctioning China’s unfair trade practices.?
That said, the U.S. President seems to have a blind spot regarding trade overall. He appears to believe that all trade is detrimental and that any foreign entity attempting to trade with the U.S. should be penalized. Why impose tariffs on Australia when the U.S. maintains a trade surplus with it??
Outside of China, implementing permanent sanctions makes little sense.?
The core issue for the U.S. lies in its savings and investment dynamics, not trade per se. The U.S. saves too little.?
On the point about wages. If wage rates were the issue then Mali and Western Sahara ought to manufacturing titans.
Australia has been mostly hit with the general 10% tariff which seems a revenue raiser than anything else.
the notable exception is aluminium and steel. However, the energy subsidies applied by the Albanese Government to offset the fruit of our stupid energy policies are, for a mainly exported product ( to the USA no less) no doubt regarded by the yanks as a very big export subsidy.
Those are examples of free trade for me but not for thee. The problem of free trade is it assumes everyone acts with openness and commitment to the concept. The Chinese of course, have not. Only the anglosphere has (mostly) been so stupid.
Australia charges 10% GST
Roger Partridge is to Quadrant what Jessica Tarlov is to The Five.
A waste of space.
Ditto Harold Ford jr. who has, like her, spent the past four years excusing the Biden Puppetocracy for everything.
Not to mention playing funny buggers with your currency
There is no such thing as Free Trade.
The Great Powers will always play games for their own advantage.
Yep, comparative advantage, absolute advantage, the invisible hand of markets, value is created and not made, specialisation of labor, free markets work better than ones under government control, importance of competition and contestable markets. All wrong headed baloney.
Adam Smith didn’t come up with comparative advantage.
And I listed the points I think he was wrong about and where I think future people have misconstrued his work.
Can you address that?
Smith would have never guessed English speaking people would have had China building ships for its military.
He would never have foreseen a time when nations would have let go their merchant marines and trade would have occurred under flags of convenience, or mercantilist adversaries given preferred trading status.
When he does address these types of things, what he writes is foundered on a belief that these things could never happen.
And under an English society in the midst of industrialisation, they aren’t conceivable.
Mind reading mixed in with confected bullshit.
No, he explicitly said much of what I’m saying in the Wealth of Nations.
You don’t have to read his mind, he states, for example:
Why would Adam Smith think anyone would do something so stupid?
Im with JC on Smith, but also agree that the only people that take free trade relatively seriously are us. but we do have an appalling history in its application and even now still maintain a few non tariff barriers.
Great, Ricardo did. But he was correct with the others.
Sure, he was correct on all the points he raised.
From 1780 to 1815, British excise revenues grew from under a million pounds to 25 million pounds.
During which time they defeated Napoleon, conquered India and ruled the waves.
During the same period, there were no income taxes.
Only land taxes and various excise taxes.
We, on the other hand, have land taxes, excise taxes, stamp duties, income taxes, fines, fees and an out of control government not concerned with external expansion, but with increasing internal control.
If the British had taxed alcohol and tobacco at the levels they are today, forget about the American revolutionary war, they would have lost the whole empire.
Pommyland outdid the froggies through being better at raising funds. Excise sure, a bit. But the real difference was the application of modern banking processes and issuing government bonds, an idea it copied from the Dutch. See also the funding of empirical expansion. Oh, and a focus of using that money to build things, rather than welfare of various kinds.
You have to be able to pay the interest on the bonds you issue.
They all issued government bonds.
France defaulted after the Revolution.
While there was zero, let me repeat, zero welfare. The US could operate the current military under the same economic policies. Don’t have a point?
The major expense was the navy and army to protect overseas assets and trade.
That required funding.
It was funded by excise, because it was primarily those engaged in trade who benefitted from the Royal Navy and British Army.
There was no welfare because the population was engaged in running an empire which required seamen, marines, soldiers, and all manner of working men.
Smith was writing in the aftermath of Britain winning the Seven Years War, only to lose America to the American Revolution.
Britain was afraid of pushing the other European powers too far and causing them to ally against her.
Smith’s proposed trade policies should been seen in that light, similar to the imbalances that the USA allowed post WW2.
Smith’s writings played into that strand of thought, or gave an economic justification for it.
The Seven Year’s war:
https://www.youtube.com/watch?v=fbgoziHQ3cU
Taxes in France pre Revolution:
Land, income and a tax on family.
Today, we should take from this that while the English taxed trade in goods, and not people or incomes, the French taxed the peasants in the same way we do today: for everything, at every turn, while the rich were exempt.
Not only did the French way of raising taxes not cover the interest payments on debt, they so infuriated the population that they were ready to revolt.