by Pierre Lemieux

I suggest that Adam Smith was still a bit too trustful of the state and that he would be more prudent if he were to come back to life in our times.

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On March 1, President Donald Trump announced his intention to impose special tariffs on steel and aluminum for reasons of national security. David Henderson and Scott Summer have already weighed in on the issue, but I would like to discuss the specific national-security argument.

The argument that national security justifies exceptions to free trade has some economic credentials: in his defense of free trade in The Wealth of Nations, Adam Smith made a few exceptions “when some particular sort of industry is necessary for the defence of the country.” He argued that the Navigation Acts, which prohibited imports on foreign ships, were useful for keeping ships and sailors ready for possible wars. He thought it was “perhaps” justifiable to subsidize some strategic domestic industries such as gunpowder manufacturing if necessary to maintain domestic suppliers.

I think this argument is generally invalid, at least in peacetime. First, it can justify a lot of protectionism, if not complete autarky. National defense and homeland security combined consume only 3% of American steel and, many other things are necessary to a warring state as well. Computers, robots, and electronic components are certainly as important nowadays as hard metals. Clothing is certainly a necessity lest soldiers or citizens risk wardrobe malfunctions. Looking at short and emaciated North Korean soldiers, food must be important, too. If a warring government is to maintain public support, a measure of self-sufficiency in many consumer goods should be guaranteed. The population will be less war-tolerant without wine, toys for children, etc.

As I was putting the last hand on this post, the Wall Street Journal of March 6 announced a surprising intervention by a federal agency, the Committee on Foreign Investment in the U.S. (CFIUS), for which “there are few if any recent public precedents.” On grounds of national security, the CFIUS ordered a delay in a shareholders’ meeting of Qualcomm, a San Diego company, which was due to consider a takeover bid by Broadcom Ltd., based in Singapore. Both companies are in the business of chip making, wireless technology, and telecommunications networking. Broadcom had recently promised to relocate to the United States, a move that won the lavish praise of the newly elected President. Last November, President Trump said that Broadcom was “one of the really great, great companies” and its chief executive, “a great, great executive.”

If it is justifiable to limit the importation of goods that could be useful in a future war or to prevent the shareholders of an American company from selling their shares to a company listed on NASDAQ, would it not be justifiable to constrain, if not forbid, the emigration of individuals valuable for national defense? In the late 17th and early 18th century, the British government prohibited the emigration of skilled artisans, under penalty of loss of citizenship and property. The reason was straight protectionism, that is, to prevent such skilled immigrants from helping foreign competitors build machines similar to those used by British producers–in textile manufacturing, for example. (An interesting article on this subject by historian David Jeremy can be found in the Spring 1977 issue of the Business History Review.) Adam Smith did not agree with these restrictions; he wrote:

It is unnecessary, I imagine, to observe, how contrary such regulations are to the boasted liberty of the subject, of which we affect to be so very jealous.

But note how the national-security excuse could be used for banning the emigration or foreign travel of, say, aeronautical engineers, AI experts, or the executives of Boston Dynamics. These individuals would certainly be as useful to a war effort as metals that can be found in large quantity in North America.

A second, related reason for questioning the national-security argument for protectionism is that it can be too easily used as a mere excuse for straight protectionism. The 1920 Jones Act, which limits cabotage (shipping between American ports) to American built, owned, and crewed ships, provides a good example of a measure that has been fed by both national security excuses and protectionist reasons. The result is that the American ocean fleet is older, more expensive, and less safe, as reported by Thomas Grennes in the Fall 2017 issue of Regulation. It has also been decimated by its lack of competitiveness. The Economist of October 5, 2017 notes:

Between 2000 and 2016 the fleet of private-sector Jones-Act ships fell from 193 to 91. Britain binned its Jones-Act equivalent in 1849. Its fleet today has over three times the tonnage of America’s. Marc Levinson, an economic historian (and former journalist at The Economist) notes that the laws also made American container lines less able to compete on international routes.

As for the argument that the surviving American ships and crewmen could be conscripted as transport ships during a war, one wonders why the Navy should not be obliged to pay to hire men or equipment on the market.

It is obvious that national security is merely an excuse for the proposed new tariffs on steel and aluminum. According to the Commerce Department, 18% of the imported steel and 46% of imported primary aluminum (in volume) come from Canada. How would Canadian-made steel and aluminum be a problem for American security? Much of the remaining imports, especially in the case of steel, originate from other American allies or friends. Moreover, some 70% of the steel used in the U.S. is produced domestically; the proportion is about a third in the case of aluminum.

That the tariffs against steel and aluminum announced are just an excuse for protectionism was confirmed by both Peter Navarro, Mr. Trump’s protectionist advisor, and by Trump himself. Navarro declared:

[T]he mission here is to preserve our steel and aluminum industries for national and economic security.

The law invoked by the government to introduce such tariffs, Section 232 of the Trade Expansion Act of 1962 (19 U.S.C. §1862), does not once mention “economic security.” On March 5, Trump admitted that the new tariffs were a protectionist measure when he said he was willing to abandon or modify the project if some other protectionist measures were included in a renegotiated NAFTA; he tweeted:

Tariffs on Steel and Aluminum will only come off if new & fair Nafta agreement is signed.

I suggest that Adam Smith was still a bit too trustful of the state and that he would be more prudent if he were to come back to life in our times.

Which leads me to a more general reason for questioning national-security protectionism. It is at least unclear how “national security” could justify measures that would contradict its avowed purpose. If part of the economy is practically nationalized for national-security reasons, what is the point of national security? To protect our freedom? Turning America into a war economy during peacetime would have the contrary effect.