ADAM SMITH’S FIRST EXCEPTION TO FREE TRADE

“There seem, however, to be two cases in which it will generally be advantageous to lay some burden upon foreign for the encouragement of domestic industry.” (Wealth of Nations, IV.ii.23)

As I mentioned in a previous post, Adam Smith identifies several “exceptions” to free trade in the second half of Book IV, Chapter 2 of The Wealth of Nations. Alas, as we shall soon see, some of these “exceptions” are so sweeping in scope that they could end up sabotaging the case for free trade.

Take, for example, Smith’s first exception: national defense. To illustrate this exception, the Scottish philosopher-economist trots out the “act of navigation” (i.e. the Acts of Trade and Navigation or “Navigation Acts” for short), a series of shipping laws dating from 1660 that strictly regulated trade between Britain and her colonies and with other countries:

“The defence of Great Britain … depends very much upon the number of its sailors and shipping. The act of navigation, therefore, very properly endeavours to give the sailors and shipping of Great Britain the monopoly of the trade of their own country in some cases by absolute prohibitions and in others by heavy burdens upon the shipping of foreign countries.” (Wealth of Nations, IV.ii.24)

Worse yet, Adam Smith not only defends this shipping monopoly on national security grounds; he actually extols the Navigation Acts as, and I quote, “the wisest of all the commercial regulations of England” (WN, IV.ii.30).

What? Is Smith being serious here? The Navigation Acts were the linchpin of Britain’s mercantilist system; among other things, these onerous laws prohibited the use of foreign ships and required the employment of English and colonial mariners for 75% of the crews. (By the way, where have we heard this before? If the old Navigation Acts ring a bell, that’s probably because these onerous laws were the British equivalent of the Jones Act, a modern-day U.S. shipping law that many of my North American readers will be familiar with.)

To his credit, Smith concedes that the Navigation Acts make Britain poorer: “By diminishing the number of sellers, therefore, we necessarily diminish that of buyers, and are thus likely not only to buy foreign goods dearer, but to sell our own cheaper, than if there was a more perfect freedom of trade” (WN, IV.ii.30). But he nevertheless defends the Navigation Acts because “defence … is of much more importance than opulence” (ibid.). For Smith, national security trumps prosperity.

But the fatal flaw with Smith’s premise is that almost anything we do has some connection, however remote, to national security! In any case, it gets worse, for Smith’s next major exception to free trade is even more broad and sweeping than the first one, so stay tuned, I will consider Smith’s second exception in my next post …