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Quotation of the Day…

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… is from page 553 of Douglas Irwin’s excellent essay “Adam Smith and Free Trade,” which is chapter 32 in the 2016 volume, edited by Ryan Patrick Hanley, Adam Smith: His Life, Thought, and Legacy [2]; Doug is here writing about Adam Smith’s views on trade policy:

The fundamental principle was still clear: free trade should be pursued independently of other countries’ policies.  But if a country can affect the trade policies of its trading partners, a tactical complication is introduced.  Economic analysis in itself is of little guidance because it cannot indicate the circumstances under which a given retaliatory action will or will not reduce foreign trade barriers.

DBx: I add two observations, each of which, I’m vain enough to believe, Smith would endorse.

First, although formal economic analysis as such offers little guidance for improving our predictions of governments’ actions and reactions in so-called “trade wars,” public-choice economics [3] here lends a helping hand.  Once we recognize – as we do from public choice – that governments are overwhelmingly in service to a handful of existing domestic producer groups rather than to the general welfare of the country, there is no reason to believe that the exercise by any government of discretionary power to wage “trade wars” will be carried out for the benefit of the people of the nation at large.  Such wars by each government will be carried out to enhance the welfare of those existing, politically powerful producer groups who are served by government.  “Trade wars” are wars carried out in the service of crony capitalists.

Second, and relatedly, because the explicit purpose of state officials who wage so-called “trade wars” almost always is to expand the exports of politically influential domestic producers and to reduce the imports that compete domestically with the outputs of these producers – because allowing their citizens to purchase more imports is almost always regarded by government officials as a concession to other countries, or as a “price” to be paid in order to gain the ‘prize’ of being able to export more – economic theory proper does tell us that the very purpose of “trade wars” is perverse.  Economic theory proper tells us that if a government should by its own criterion “win” a “trade war,” the people of that country will lose: the people of that “victorious” country will receive fewer goods and services from foreigners and, in exchange, send more goods and services to foreigners.  Perversely, then, the citizens of any country whose government wages a “trade wars” stand to gain largely by how successfully the governments of other countries resist the efforts of their own government.

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