Adam Smith's Free Trade in Wealth of Term Paper

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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).

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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).

Political Uncertainty

More and more companies are becoming multinational, seeking to expand their businesses to new markets outside the United States and Western Europe. Mexico is now the United States' second largest trading partner, after Canada. China is the fourth largest trade….....

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