Britain must not forget the lessons of Adam Smith
Adam Smith taught us that trade is not a zero-sum game 250 years ago. Trump may not have read his Wealth of Nations, but the rest of the world now must, says James Price
Much ink has been spilled over Trump’s tariffs in the past few weeks. At a glance, the bear case is that the structure of the global economy just changed, and therefore the real price of assets is unknowable, and investors should sell. And the bull case? Buy when others are fearful, trust the US will get a load of deals on reciprocal tariff reductions and stocks come roaring back.
But those of us with less skin in the immediate game, would do well to copy the shadow leader of the House of Commons, Jesse Norman MP, and look backwards to history to glean some understanding of what might happen as a result of these moves. A biographer of Adam Smith, Norman reiterates Smith’s case in favour of competition and light-touch government interference as the surest way to create prosperity.
Yes, Smith conceded the need for occasional and temporary protections, just as even the most enthusiastic advocates for free trade have always done. Ronald Reagan was the standard bearer for bringing down walls, whether concrete or economic, but he used tariffs against Japan, Spain and others, just as Smith supported the Navigation Acts. But Norman rightly quotes Smith’s broad line, that “Nothing … can be more absurd than this whole doctrine of the balance of trade.”
The President clearly disagrees. He seems to think that a trade deficit is a weakness that America must correct, and that protectionism is necessary to redress this imbalance. This is like me thinking that I have an unfair trade deficit with my dentist, and should therefore charge myself more to see him in order to encourage me to learn to do my own root canal surgery.
America’s ballooning debt
But Smith also warned against excessive government debt, saying that “the progress of the enormous debts which at present oppress, and will in the long run probably ruin, all the great nations of Europe”.
Well, America has a government debt of over $35 trillion, which given compounding interest payments, has started to balloon out of control. The Biden administration added something like $5bn to that for every day it was in the White House, meaning about a trillion dollars every 100 days by the end.
It costs American taxpayers about a trillion dollars a year to service that debt, and almost $8 trillion of it needs refinancing in 2025 alone (based on maturing bonds and short-term notes).
These are numbers that would have seen Smith weeping into his porridge.
Some have speculated that the scale and seeming arbitrariness of the tariffs (anyone checked on how that island inhabited only by penguins is coping with its 10 per cent tariff?), is a ploy to drive investors to US Treasury securities (gilts). Those securities will have hiked in price and cut in yields, easing the $1 trillion interest bill, and lowered the cost of refinancing government debt, moving repayments onto a more affordable path.
Big tax cuts, DOGE efficiencies, and supply side reforms could then help mitigate against the pain of the tariffs, along with the revenue collected from them. And if in the process, Trump manages to break down the barriers that other nations have long erected against US companies, then he could announce a series of deals with them and take a win for what he would call ‘fair trade’.
This, to be clear, is to steelman the Trump administration’s stance as best as I possibly can, before tariffs make that steel too expensive. Whether Trump is a 4D chess-playing genius who will successfully refinance America’s debt, or even emerge as the ultimate free trader by forcing down other nation’s barriers, is still anyone’s guess.
One thing is clear though, that the protectionist impulse is a strong one in the human psyche: “Each nation has been made to look with an invidious eye upon the prosperity of all the nations with which it trades, and to consider their gain as its own loss.”
If Trump and the US fail to heed the ample lessons in The Wealth of Nations, Britain can benefit by becoming once again the standard bearer for Smithian ideas. And it must.
James Price is a senior fellow at the Adam Smith Institute