“There is no commercial country in Europe of which the approaching ruin has not frequently been foretold by the pretended doctors of this system [i.e. mercantilism/protectionism] from an unfavourable balance of trade. After all the anxiety, however, which they have excited about this, after all the vain attempts of almost all trading nations to turn that balance in their own favour and against their neighbours, it does not appear that any one nation in Europe has been in any respect impoverished by this cause. Every town and country, on the contrary, in proportion as they have opened their ports to all nations, instead of being ruined by this free trade, as the principles of the commercial system would lead us to expect, have been enriched by it.” (WN, IV.iii.c.14; my emphasis)

Adam Smith concludes Chapter 3 of Book IV of The Wealth of Nations with a scathing critique of mercantilism/protectionism: “Nothing, however, can be more absurd than this whole doctrine of the balance of trade, upon which, not only these restraints, but almost all the other regulations of commerce are founded.” (WN, IV.iii.c.2; my emphasis) For Smith, this doctrine is not only motivated by racism, by “the violence of national animosity” (WN, IV.iii.c.13); it is also logically unsound and absurd! Why absurd? Because wealth and money are not the same thing. True wealth consists of goods and services:

“There is another balance, … very different from the balance of trade, and which, according as it happens to be either favourable or unfavourable, necessarily occasions the prosperity or decay of every nation. This is the balance of the annual produce and consumption.” (WN, IV.iii.c.15)

But how does trade increase this alternative balance, i.e. “the balance of annual and produce consumption”? Simply put, how does free trade make a nation more wealthy? According to Smith, when nations open up their markets and trade with each, they can specialize in what they do best. If France, for example, produces cheaper and higher-quality wine than England does, then England would be better off importing French wine instead of trying to produce her own lower-quality higher-cost wine, and this conclusion holds regardless whether England’s importation of wine creates a trade deficit. Why? In a word (two words): opportunity cost. If the owners of capital in England use their capital to produce wine, then that capital cannot be used to produce other goods and services. Capital assets are finite, scarce resources. (See WN, IV.iii.c.2-7)

Free trade thus allows a country to put her capital assets to their highest-valued, most productive uses. To drive home this point, Smith presents the following memorable analogy:

“It is a losing trade, it is said, which a workman carries on with the alehouse; and the trade which a manufacturing nation would naturally carry on with a wine country may be considered as a trade of the same nature. I answer, that the trade with the alehouse is not necessarily a losing trade. In its own nature it is just as advantageous as any other, though perhaps somewhat more liable to be abused. The employment of a brewer, and even that of a retailer of fermented liquors, are as necessary divisions of labour as any other. It will generally be more advantageous for a workman to buy of the brewer the quantity he has occasion for than to brew it himself, and if he is a poor workman, it will generally be more advantageous for him to buy it by little and little of the retailer than a large quantity of the brewer. He may no doubt buy too much of either, as he may of any other dealers in his neighbourhood, of the butcher, if he is a glutton, or of the draper, if he affects to be a beau among his companions. It is advantageous to the great body of workmen, notwithstanding, that all these trades should be free, though this freedom may be abused in all of them, and is more likely to be so, perhaps, in some than in others. Though individuals, besides, may sometimes ruin their fortunes by an excessive consumption of fermented liquors, there seems to be no risk that a nation should do so.” (WN, IV.iii.c.8; my emphasis)

But if free trade is so good, why does self-defeating Trumpian mercantilism and protectionism still prevail? Smith blames both the owners of capital and labor, i.e. “the sneaking arts of underling tradesmen” (IV.iii.c.8) as well as the “monopolizing spirit” (IV.iii.c.9) and “interested sophistry” (IV.iii.c.10) of “merchants and manufactures”:

That it was the spirit of monopoly which originally both invented and propagated this doctrine cannot be doubted; and they who first taught it were by no means such fools as they who believed it. In every country it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest. The proposition is so very manifest that it seems ridiculous to take any pains to prove it; nor could it ever have been called in question had not the interested sophistry of merchants and manufacturers confounded the common sense of mankind. Their interest is, in this respect, directly opposite to that of the great body of the people.” (WN, IV.iii.c.10)

Once again, we see a deep tension in Adam Smith’s thought: on the one hand, when markets are free, the owners of capital and labor have an incentive to put their assets to their most productive uses, but when a country is free (in the political sense), these same owners of capital and labor will use their power and clout to try to shut down competition and protect their economic interests at the expense of the public good!