Happy 293rd birthday Adam Smith

It’s Adam Smith’s 293rd birthday. What would the pioneering Scottish economist, who in 1776 published The Wealth of Nations as a staunch defence of free trade, make of the world and its economic relations today?

At one level, he would be delighted. His free-trade message certainly got through to most of his fellow economists today. They share his view that trade benefits both sides – both buyers and sellers. After all, neither side would voluntarily strike a bargain unless they each thought it would make them better off. That is why Smith argued for ending Britain’s ‘beggar my neighbour’ policy, dropping trade barriers – a source of particular contention in the American colonies – and welcoming open trade with anyone who would reciprocate. 

And over the years, politicians too have heeded this economic message. So with a lot of pushing from the World Trade Organization (WTO) and the General Agreement on Tariffs and Trade (GATT) talks that preceded it, import tariffs – the taxes that countries impose on imports from others – have fallen all over the world. Smith would be delighted. And he would be particularly delighted by how the globalization created through such free trade has helped the poorest countries of the world more than anyone – taking perhaps two billion of the world’s population out of the most abject dollar-a-day poverty. 

But Smith might cast his eye over the EU and the US – which account for 60% of world GDP, 33% of trade in goods and 42% of trade in services – and wonder whether the message has really sunk home. Tariffs may have fallen, but all kinds of non-tariff barriers – technical, regulatory, paperwork and administrative hurdles – remain, all designed specifically to protect domestic producers and keep out other people’s goods and services. Even in places where a ‘single market’ is supposed to exist – like the EU – it does not. Though the EU accepted the principle of a common market in services ten years ago, it is only very partially applied. Just try selling insurance or banking products in France and Germany. And this, of course, is a particular problem for the UK, which is home to the EU’s leading international financial services sector.

And again, while EU tariffs against other countries average just 3%, some discriminate massively against other, non-EU countries, including many of the world’s poorest. The UK’s once-prosperous sugar processing industry for example, is now a pale shadow of its former sense. The tariffs on non-EU sugar imports are just too high. And that has a particularly damaging impact on poorer countries where sugar can be just about the only cash crop.

Africa produces $2.4 billion worth of coffee each year – rather less than the Germans make from processing and re-selling it – but EU tariffs of 30% on processed cocoa products like chocolate or coco powder (and tariffs of 60% on some other cocoa products) are blatant discrimination. Not only does it mean that Africa sells less cocoa. It also means that there is less investment, innovation and technology going into the crop. So it keeps African cocoa farmers poor.

Added to which, Africa imports over 80% of its food; and the EU, with its highly protectionist agricultural policies and large clout in world markets, actually raises the price of food. Trade economist Professor Patrick Minford thinks the effect could easily be 10% or more. So not only does the EU keep out African agricultural products, it also forces Africans to pay higher prices for their food on world markets.

And Smith would also be worried about the mood that is developing in the US. Despite being relatively open to trade for half a century or more, the US has always been quick to protect certain industries – like steelmaking and auto manufacturing, for example. The result is that US steel- and car-makers have had too easy a time, have not innovated fast enough, and have been eclipsed by lower-cost providers in other countries.

President Obama has been lukewarm on trade freedom, opposing the Keystone pipeline and showing no support for dropping the prohibition on US crude oil exports. In the Presidential election campaign, meanwhile, the protectionist rhetoric has been ramping up. Republican front runner Donald Trump has advocated forcing US companies to ‘bring manufacturing home’ – that is, to stop outsourcing to other countries – and generally to tear up US trade agreements. His arguments have not faced much opposition: indeed, the Democrat hopeful Bernie Sanders agreed wholeheartedly with them. Democrat front runner Hillary Clinton, meanwhile has no clear stand on trade agreements, though she likes to pepper her speeches with digs about ‘hedge fund managers’ and ‘billionaire CEOs’ who are more interested in a buck than the health of the US workforce. And recent voting in Congress show that her party is becoming more protectionist.

Many of the other candidates, too, have opposed ‘fast track’ negotiation of the TPP trade agreement with Asian countries, which looks certain to be kicked into the longish grass of the next Administration. The Transatlantic Trade and Investment Partnership (TTIP) talks, meanwhile, are hitting the sand of protectionist demands from various of the EU’s 28 member states. (As is the EU’s proposed trade deal with China – bogged down by demands from Italian tomato growers and suchlike.) 

As a big winner from globalization – think silicon valley, aircraft makers, pharma companies, the music and movie industries – the US has much to gain from focusing on the global market, and not just its domestic market. But will it keep its doors open to others, or is it going the way of Nigeria and Venezuela?

Smith was a quiet and modest man. But he would give both the US and the UK – not to mention Russia, China, India, Indonesia and all the other countries who have been raising trade barriers – a very stern talking to.

Eamonn Butler is Director of the Adam Smith Institute