Barriers to international free trade in Adam Smith's framework

¶ … Adam Smith's Free Trade

In Wealth of Nations, Adam Smith recognized that human beings have a natural propensity "to truck, barter, and exchange one thing for another." Smith saw the free trade of goods across borders as an extension of this human instinct. People exchange products and services as "free agents" in pursuit of their own individual interests. In the process, people become part of an international economy, connected across national borders, as if guided by an "invisible hand."

Smith's concept of free trade was challenged immediately upon the book's publication. Indeed, while the urge to trade and barter may be an integral part of human nature, there remain significant barriers to international free trade. This paper examines some of those barriers, namely the institution of protectionist laws, political uncertainty in different countries and the lack of adequate infrastructure in many lesser-developed countries, such as roads and telecommunications.

Protectionism

Protectionist policies are not a new phenomenon. In the mid- 19th century, Friedrich List, a professor of political economy, believed that newly-established industries cannot possibly compete with more established industries abroad. Therefore, to protect its own "infant industries," countries should erect protectionist barriers to keep the prices of foreign manufactured goods as high as the costs of production of the new industrializing domestic enterprises (List, 1885).

To this day, even the United States, arguably the staunchest supporter of free trade, continues to practice protectionist regulations. For example, a large part of the U.S. automobile industry is protected by high tariff. Vehicles that are classified as light trucks are hit with 25% import duty, compared to only 2.5% for cars. The large import duty effectively keeps competitors from Japan, South Korea and other countries out of the market (Dieter 2003).

Such protectionist policies are unwarranted even by List's standards, since the 40-year-old American automobile industry hardly qualifies as an infant industry. Instead, given the current popularity of pick-up trucks, SUVs and other larger vehicles, the high tariffs serve to limit a significant part of the car the market to American car manufacturers, thus limiting consumer choice.

Protectionism remains alive and well in most industries across the world. The Philippines, for example, is protesting tariff barriers to its exports of tuna fish to the European Union. Philippine government officials charge that while former European colonies in Africa, the Caribbean and the Pacific can export tuna to the European Union levy-free, canned tuna from the Philippines is charged a 24% tariff (Hookway 2002).

Protectionist policies take several forms, including high and unequally applied tariffs, trade embargos, quotas and even sizeable government subsidies. For example, governments in the United States, Europe, Japan and other rich countries dole out more than $300 billion every year in farm subsidies to its most affluent farmers. These production incentives create oversupplies of crops like cotton. These crops are then dumped into the world market and sell for up to 20% less than the actual cost of production. Many export-oriented agricultural countries across Africa, South Asia and Latin America cannot compete with government-subsidized products at home, much less on a world stage (NYT 2002).

Lack of infrastructure

Free trade presupposes the existence of adequate infrastructure to support business exchange. In Adam Smith's day, this took the form of roads, merchant fleets and banks. This day, there is the added dimension of technology.

Many developing countries find it difficult to compete with foreign-made goods that are manufactured more cheaply with automated technologies. It is also more difficult for American companies to expand into countries without the rudiments of travel or telecommunications infrastructure.

In the capital-rich economies of the Middle East, countries from Syria to Morocco are hampered from free trade by primitive financial infrastructure. The lack of modern banks has created a chronic illiquidity. Banks are reluctant to lend money and Arab stocks can hardly trade. Arab manufacturers are unable to get cash capital and their overvalued currency prices their goods out of the world market. Because of these difficulties, Arab manufacturers export well below their potential (Glain 2002).

In conclusion, despite the general dominance of the principles of free trade, significant barriers remain. These take the form of protectionist policies, political uncertainty and the lack of infrastructure to support the free exchange of goods and services. As a result, much of the resulting free trade is actually an economic dominance by the more developed economies of the United States and Western Europe. While Smith may have been right in recognizing that the propensity for free trade lies in human nature, there also appears to be a corresponding human urge to stifle it.