Protectionnism and Free Trade in Economical Doctrines

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5. In the international trade must be promoted the policy of free competition (without monopolies) and a policy of free exchange (non- discriminating).

Much as Smith was aware of the benifits of free trade and was able to influence the British economic thought, he was not an unqualified free trader. He singled out two primary cases which in his view justified the imposition of barriers on imports for the purpose of encouraging domestic industry.

First, some particular industries may be necessary for the defense of a country. From this point of view, the British Navigation Acts, inasmuch as they promoted the building up of a merchant marine to be used in peace and war alike, were perfectly sensible.

The second case is an application of the principle that normally competitive conditions should not be distorted by government intervention.
Consequently, it will be proper to place a burden on foreign industry if this merely neutralizes the disadvantage under which domestic industry operates because it is burned with some taxes from which the foreign producers are exempt. After the imposition of a "matching" tariff duty, a form of equalizing adjustment no larger portion of domestic labor and capital would be devoted to the particular domestic industry of a country than what would naturally go to it. "It would only hinder any part of what would naturally go to it from being turned away by the tax, into a less natural direction..." Smith does not underrate the difficulty arising from the fact that imported commodities are seldom perfect equivalents of the domestic produced variety.

Adam Smith took up two secondary cases in which he held it to be a
"matter of deliberation" whether or not to follow a laissez-faire policy.

The first deals with the advisability, pro and con, of imposing a retaliatory duty designed to bring about the repeal of a duty imposed by a foreign country. The success of taking such a step, Smith holds, will always be open to guess; and unless the odds are distinstly in its favor, the "...transitory inconviniency of paying dearer during a short time for some sorts of goods" would not be justified.

The second possibility, where the issue is not the imposition of a new tax but rather the return to free trade from the evils of protection, centers around the need of preventing a sudden painful shock to a domestic industry. This will be largely a question of size: only when a "great multitude of hands" would all at once be deprived of their ordinary employment and livelihood by the removal of high duties and prohibitions in some special regard to their welfare in order. Indeed, Smith feels, it becomes a matter of equity in this case that the return to exposure to competition from foreigners be undertaken "...slowly, gradually, and after a very long warning".

Bounties on exports, that is, government payments to exporters of goods who could not otherwise effectively compete with their foreign rivals, were, as we might expect, another device of the "mercantile system" scorned by Smith. They can only warp the natural allocation of resources.
Since a country cannot force the buying of its exports on other countries, the next best expedient may be found in one country paying another for the buying of exports. But doing so, through bounties, will force a country's trade in less advantageous channels than that in which it would go if left alone. Domestic consumers will be the losers: under conditions of full employment they would pay a higher price for a smaller portion of the total supply, and in addition they would have to foot the bill for government payments to exporters.

Such are the highlights of the attack on the absurdities of mercantilist restrictions, which had flowered too long to suit Smith's disposition.

The Comparative Advantage Theory

Smith did not expand these ideas at much length; but David Ricardo, the second great classical economist, developed them into the "principle of comparative advantage", a principle still to be found, much as Ricardo spelled it out, in every textbook on international trade.

The principle of comparative advantage is based on what kind of product the country can produce best, in comparing not with other countries, but with the producing of other kinds of goods. In this case the country doesn't necessarily need an absolute advantage to specialize in producing and exporting it.

The major purpose of the theory of comparative advantage is to illustrate the gains from the international trade. Each country can gain by specializing in those occupations in which it is relatively efficient; it should export part of that production and take in exchange those goods in whose production it is, for whatever reason, at a comparative disadvantage.
The theory of comparative advantage thus provides a strong argument for free trade - and indeed - for a laissez-faire attitude with respect to trade.

The supporting argument is simple; specialization and free exchange among nations yield higher real income for the participants.

The act that a country will enjoy higher real income as a consequence of the opening up of trade barriers does not mean, of course, that every family or individual within a country must share in that benifit. Producer groups affected by import competition obviously will suffer to at least some degree. Comparative-advantage theorists concede that free trade would affect the relative income position of such groups, and perhaps even their absolute income level. But they insist that the special interests of these groups clashes with the total national interest, and the most that they are usually willing to concede is the possible need for a temporary protection against import competition, in order that the persons affected may have sufficient time to move to another occupation.

David Ricardo

In his theoretical researches D.Ricardo did not base apon extensive empirical researches but mainly engaged in abstract reasoning. In working out his international trade theory, he also founded his conclusions apon a set of postulates which he considered as first approximations of the real world. The conclusions he drew, being valid within the framework of his assumptions only, had of course to be modified before they could be applied to actual circumstances.

The same is also true for Jean-Stuart Mill, whose studies in international trade theory completed the framework built by Ricardo. In spite of many attacks and emandations, the main structure of the Ricardo-
Mill theory of international trade remained basically unimpared untill well into the 20th century.

He left however, much unfinished business for his successors, since his statements did not explain how the actual ratios of international exchange determine international prices.

Ricardo has been attacked on many grounds: his statement of the doctrine in terms of labor costs only; his assumption of constant cost of production; and, of course, his artificial assumptions of perfect factor mobility within a nation as against complete factor immobility internationally. Many feel that these demerits are minor and are overshadowed by the fact that his new approach opened up entirely new vistas for further research, for example, a restatement of the principle in terms of opportunity costs.

John Stuart Mill

Ricardo's contribution left unanswered the question of how the actual ratios at which goods exchange are determined. It was Jean Stuart Mill who explained the determination of the terms of trade and did so with great skill. He found that they are dependent on reciprocal demand and that the equilibrum exchange ratio is the ratio that equalizes the values of exports and imports for each country in a two-country two-commodity situation. With the "Equation of International Demand" as a tool, he proceeded to envisage more complicated situations and explain what modifications in assumptions their analysis necessitated. His work helped greatly in clarifying the intricate problems connected with the theory of international values and strengthened the foundations on which others could build.

Among the other representatives of classical school we can pick up such economists as Nassau William, Senior, John Elliot Cairness, the Irish one Charles Francis Bastable, whose apport in developing theory of international trade was, perhaps, the boldest, as they tried to modify the
Ricardo-Mill theory in more realistic way.

This change of attitudes led to the signing of a number of agreements embodying the new ideas, among them the Anglo-French Treaty of 1786, which ended what had been an economic war between the two countries.

After Adam Smith, the basic tenets of mercantilism were no longer considered defensible. This did not, however, mean that nations abandoned all mercantilist policies. Restrictive economic policies were now justified by the claim that, up to a certain point, the government should keep foreign merchandise off the domestic market in order to shelter national production from outside competition. To this end, customs levies were introduced in increasing number, replacing outright bans on imports, which became less and less frequent.