“Trade wars are good and easy to win,” President Donald Trump famously tweeted on March 2, 2018. (His circumstantial qualifications do not matter because they are based on a trade-balance fetish.) Anybody with reasonable knowledge, or perhaps even just a good intuition, of economic theory and history would beg to differ.
Adam Smith knew something about economics and economic history. In fact, he knew more than nearly all his contemporaries and more than Mr. Trump and his ignorant or sycophantic advisors. Smith was a moderate classical liberal, although very radical compared to the garden variety of today’s conservatives and “liberals.” He did not benefit from the future development of economic analysis that his own work would launch. He believed in exceptions to a free trade policy, which mainly had to do with national defense. But he certainly did not think that “trade wars are good and easy to win.”
He did consider that retaliatory tariffs could have a purpose, but with many qualifications as The Wealth of Nations explained:
There may be good policy in retaliations of this kind, when there is a probability that they will procure the repeal of the high duties or prohibitions complained of. The recovery of a great foreign market will generally more than compensate the transitory inconveniency of paying dearer during a short time for some sorts of goods. To judge whether such retaliations are likely to produce such an effect, does not, perhaps, belong so much to the science of a legislator, whose deliberations ought to be governed by general principles which are always the same, as to the skill of that insidious and crafty animal, vulgarly called a statesman or politician, whose councils are directed by the momentary fluctuations of affairs. When there is no probability that any such repeal can be procured, it seems a bad method of compensating the injury done to certain classes of our people, to do another injury ourselves, not only to those classes, but to almost all the other classes of them. When our neighbours prohibit some manufacture of ours, we generally prohibit, not only the same, for that alone would seldom affect them considerably, but some other manufacture of theirs. This may no doubt give encouragement to some particular class of workmen among ourselves, and by excluding some of their rivals, may enable them to raise their price in the home-market. Those workmen, however, who suffered by our neighbours prohibition will not be benefited by ours. On the contrary, they and almost all the other classes of our citizens will thereby be obliged to pay dearer than before for certain goods. Every such law, therefore, imposes a real tax upon the whole country, not in favour of that particular class of workmen who were injured by our neighbours prohibition, but of some other class.
A careful reading of this quote reveals interesting ideas close to contemporary interrogations in economics. Note Smith’s prevention against the state favoring some individuals by imposing costs on others. However, many if not most of today’s economists would argue that Smith underestimated the cost of retaliation even when it seems to work.
The point I want to emphasize here is different and more directly related to the economics of politics. From an intellectual viewpoint, we are very lucky in America to directly observe how an “insidious and crafty animal, vulgarly called a statesman or politician” is handling trade retaliation. It does not take a very pessimistic mind to think that the worst of the trade war is still to come.
READER COMMENTS
Jon Murphy
Aug 6 2019 at 11:59am
I love this paragraph. It’s incredibly nuanced and Smith at his best.
David S
Aug 6 2019 at 3:53pm
While I do agree with the premises discussed above:
Trade war – at least it’s better than militry war.
A few decades ago we likely would be invading China over this kind of stuff – progress!
Jon Murphy
Aug 6 2019 at 5:05pm
Except for when a trade war turns into a shooting war, as Smith warns about in the same part of the text.
David S
Aug 7 2019 at 7:56am
Has that happened since WWII – I think all the recent conflicts (for the US) were ideological rather than economic? If not, why not? I’d say (maybe hope?) the US has figured out there are better ways to get economic results.
Jon Murphy
Aug 7 2019 at 8:25am
Can’t recall any off the top of my head, primarily because there really haven’t been much of a trade war in almost a century. Perhaps the Cambodian-Vietnam war in the 70s or Gulf War?
Todd Kreider
Aug 7 2019 at 9:51am
Can you think of any pre World War II examples of a trade war leading to a shooting war? I’m not sure I’d call the tariffs prior to the U.S. Civil War a trade war.
Jon Murphy
Aug 7 2019 at 10:00am
Todd:
Oh yes I can. Franco-Prussian War, Crimean War, off the top of my head. Adam Smith discusses a war between the French and the Dutch. There is, of course, World War 2. All kinds of examples. Trade wars tend to precede shooting wars.
David S
Aug 7 2019 at 4:59pm
Well, that’s kind of my point – you can easily name lots of wars WWII and prior that were the (mostly) direct result of trade wars. WWII really was about oil for Japan, for example. (The US enforced an oil embargo against Japan that lead pretty directly to the Pearl Harbor attack.)
But since WWII, there haven’t been conflicts easily attributable to such things. The two you mentioned are a little bit of a stretch, as there were other extremely strong factors that probably dwarfed the trade embargo. The US has enforced trade restrictions on many countries, such as Cuba, Russia, North Korea, Iraq and Iran, so it isn’t due to a drop in such activity.
The optimist in me wants to believe humans are just getting better at minimizing conflict, difficult as it is to believe.
Jon Murphy
Aug 7 2019 at 9:54pm
The data do support that conclusion: https://ourworldindata.org/war-and-peace
Well, there is a drop in such activity: https://data.worldbank.org/indicator/tm.tax.mrch.wm.ar.zs
Trade is rapidly expanding worldwide.
Thaomas
Aug 7 2019 at 8:18am
“Note Smith’s prevention against the state favoring some individuals by imposing costs on others.”
It is interesting to wonder what Smith would have though if he had considered the possibility of imposing costs on “some individuals” of high consumption in order to favor others with lower consumption.
I don’t think that pointing out that President Trump’s trade war favors some individuals over others is a very effective line of criticism.
Jon Murphy
Aug 7 2019 at 8:23am
He did consider that. Staunchly opposed (see Book V of Wealth of Nations)
Thaomas
Aug 7 2019 at 8:06pm
I’m not doubting, but as I don’t have access, could you give a snippet of the argument.
Jon Murphy
Aug 7 2019 at 9:58pm
Long story short, taxes are a violation of liberty, and while they may be necessary, they should only be insofar as is necessary for the state to execute its mission of preserving communitive justice, prevention of invasion, and perhaps some public works. Otherwise, as long as man is free, within the bounds of justice, to carry on his industry, he will advance both in terms of opulence and morality
Todd Kreider
Aug 7 2019 at 1:27pm
Todd:
Oh yes I can. Franco-Prussian War, Crimean War, off the top of my head. Adam Smith discusses a war between the French and the Dutch. There is, of course, World War 2. All kinds of examples. Trade wars tend to precede shooting wars.
——–
I’d say with 95 percent certainty that your last statement is wrong. Your claim that a trade war caused the Crimean War is news to me and the Wikipedia article on that war doesn’t mention trade at all.
I don’t see how a trade war started World War II either, whether in Europe when Germany took Austria and Hungary or in the Pacific when Japan bombed Pearl Harbor. The oil embargo may have falsely spooked the Japanese (I think energy economist M.A. Adelman called Japan’s action the greatest act of buyer’s panic in history) but there was no trade war.
Jon Murphy
Aug 7 2019 at 3:54pm
Care to make a bet? Open to hearing offers.
Todd Kreider
Aug 7 2019 at 5:18pm
How would you quantify what a trade war is? For example, we are clearly not in a trade war now, although there is a small chance that could happen.
Also, you seem to be saying that around 75% of all wars began with a trade war and that that was a significant cause for the shooting war to start.
I think under most people’s definition of a trade war, it is clear that most wars didn’t start with one.
Jon Murphy
Aug 7 2019 at 9:55pm
Odd that you objected to my comment without even a definition of trade war in mind.
Jon Murphy
Aug 7 2019 at 9:56pm
No. All I said was trade wars tend to precede shooting wars. I made no quantification nor claim of significance of causation.
Todd Kreider
Aug 7 2019 at 10:25pm
Trade wars are very rare, so I don’t see how they could tend to precede shooting wars. There is no mention of a trade war prior to the Crimean War nor did one exist that I know of on the eve of Hitler taking Austria and Czechoslovakia. If they are as common as you say they are before a shooting war, you should be able to quickly come up with 10 or 15 examples.
Jon Murphy
Aug 8 2019 at 7:42am
Todd:
You are reading a lot more into my comment then I am saying. Re-read what I have said and read it literally. If you find yourself imputing meaning or numbers there, it is incorrect; ask me. I am making a qualitative argument, not a quantitative argument (mainly because I do not have the research right in front of me and it is not worth going searching for at the present moment).
Pierre Lemieux
Aug 8 2019 at 11:51pm
Todd: 88% of the economists polled by the Wall Street Journal now say that a trade war is the right term for the current clash. And the Journal itself now deems the term appropriate. See today’s story (Thursday, August 8):
“Economists Upgrade U.S.-China Trade Conflict to ‘War’
In a WSJ survey, 87% of respondents say it’s a ‘trade war,’ up from 50% a year ago”
Cooper H
Aug 8 2019 at 7:15am
On the topic of IP theft, what do Smith and the other Gods of Economics have to say? Isn’t IP theft the big problem with China? (undergrad econ student here, I apologize if this is blatantly ignorant)
What are the proven better ways to deal with China’s economic tactics that affect the US?
Jon Murphy
Aug 8 2019 at 7:45am
Few points:
First: China’s IP theft is greatly overstated (see, for example: https://triblive.com/opinion/donald-boudreaux-chinese-ip-theft-doesnt-justify-trumps-tariffs/).
Second: I think we can assess what Smith would have to say based on the above-quote. If it actually achieves the goal, it may be desirable. If it does not, then no. Trump’s trade war has had the opposite effect with China.
Third: there are already institutions in effect for dealing with IP theft, including the WTO and current US legislation. The trade war doesn’t do anything here except harm Americans
(And all this is ignoring the fact that IP theft is a post-hoc justification for the tariffs).
Pierre Lemieux
Aug 8 2019 at 11:23pm
You’re right, Jon.
Niko Davor
Aug 8 2019 at 3:25pm
Donald Trump himself admires Adam Smith and quotes Smith intelligently in his books. I suspect Lemieux hasn’t read Trump’s books. Or the Trumponomics book written my accomplished free market economists Moore and Laffer.
When Lemieux writes things like “Trump and his ignorant or sycophantic advisors”, I get the impression that I’m reading an emotional point of view, and not a calm, clear headed one.
Many of Trump’s public remarks such as the one that trade wars are “easy to win” are intended as a brash form of political theater more than serious economic policy.
Pierre Lemieux
Aug 8 2019 at 11:29pm
Niko Davor: There is not a whiff of evidence that Trump read the books published under his name. Just listen to him talk.
If you read what Peter Navarro has written since 2004, I think you’ll understand what I mean. Have a look at my Regulation feature on him.
Serious economists who follow Trump are rare, and for good reasons. “Trump and his ignorant or sycophantic advisors”, for example, have ludicrous theories about trade deficits. I have a number of EconLog posts on this.
Jon Murphy
Aug 9 2019 at 10:55am
There’s a large gap between quoting Smith and understanding him. See my blog post here: https://www.jonmmurphy.com/a-force-for-good/2019/8/5/the-subtle-adam-smith
Todd Kreider
Aug 9 2019 at 2:15am
Jon,
All I’m asking for is examples, and you haven’t provided them. There was no trade war prior to the Crimean War. If there was, then why can’t you lin to that information?
Jon Murphy
Aug 9 2019 at 7:28am
What are you talking about? I’ve provided a bunch of examples, both modern and older. But you keep rejecting them based on…well, nothing. You don’t even have a definition of trade war except the vague statement of “well, common people…”
The simple fact of the matter is trade relationships tend to deteriorate before wars. Give me examples where this is not the case.
Todd Kreider
Aug 9 2019 at 9:41am
Here are the examples you gave without showing a trade war existed prior to the war:
1. “Perhaps the Cambodian-Vietnam war in the 70s or Gulf War?”
2. ” Franco-Prussian War, Crimean War, off the top of my head.
3. “Adam Smith discusses a war between the French and the Dutch.”
4. “There is, of course, World War 2.”
I didn’t dismiss some of these for “nothing.” You need to show that there was a trade war prior to these wars yet you haven’t. What trade war was there prior to World War 2 in Europe? None. Even the oil embargo against Japan was an unusual case because the embargo didn’t stop Japan from getting all the oil they wanted from Mexico and other countries but it did spook them into an attack. Then again, that was a sudden embargo, not a trade war.
There was no trade war between the U.S. and Iraq.
It would be nice to have a name for the war that Adam Smith mentioned.
There was no trade war prior to the Crimean war that I can find. Could you show us a link to that information? If you look up the Cambodian–Vietnamese War, there is nothing about a trade war prior to the shooting.
I don’t see anything about a trade war prior to the Franco-Prussian war, either: https://en.wikipedia.org/wiki/Causes_of_the_Franco-Prussian_War
I think you need to show evidence for your strong claim, which you haven’t done: “The trade war was from time 1 to time 2 at which point war broke out.”
Jon Murphy
Aug 9 2019 at 10:01am
Except you did. You have no definition of trade war. This is the closest you came: “most people’s definition of a trade war.” That’s a classic move; define something so broad you cannot be wrong and you can appeal to some vacuous “commonality”.
Smoot-Hawley (and similar inward turns of European countries), the sanctions on Germany, and Japanese embargo.
No, but there was between Iraq and Kuwait. That’s what sparked the Gulf War.
War of 1678. I have been traveling and didn’t have my book on me, but it was in the link in this blog post, where I said to look.
Wikipedia is notoriously terrible on economic causes of things. I do not recommend them here. Other sources on the period leading up to the war, you’ll see various economic spats and sanctions between the warring powers.
Part of the Cambodian goal was to become economically self-sufficient and they were concerned about Vietnam spreading pro-Viet propaganda through trade, which lead to the war.
See my comment viz Wikipedia. Also, see the writings of Franz List and the German Historical School in general. Part of Bismark’s nationalism campaign included economic nationalism.
Todd Kreider
Aug 9 2019 at 1:03pm
You haven’t defined what a trade war is either yet you are the one saying trade wars usually preceded shooting wars. By my definition, a trade war is a tit for tat escalation of increasing tariffs enough that it is notably harming another economy. With the U.S and China, we are not in a trade war yet and trade economists like Paul Krugman would agree with this.
World War 2: The Reciprocal Trade Agreements Act of 1934 completely erased the higher tariffs that Smoot-Hawley caused by 1937 . I’ve already explained that the oil embargo wasn’t part of a trade war between Japan and the U.S/U.K prior to the Pacific War. “Sanctions on Germany” is not a trade War.
The Gulf War was between the U.S. and allies and Iraq. There was no trade war prior to the strikes against Iraq. And Saddam Hussein just rolled his tanks in and took Kuwait – that wasn’t a trade war.
There is nothing you wrote above or that I can find that there was any trade war between Vietnam and Cambodia. Pol Pot ruining Cambodia’s economy was not a trade war between the two countries.
The Economist has an article entitled: “What the original Crimean war was all about” and doesn’t mention anything about trade leading to the war.
I found a source that states Adam Smith thought the cause of the Franco-Dutch war was commercial competition in general so not sure – maybe this one is an example of what you are talking about.
I think you need to be more specific about a trade war between France and Prussia in 1870 than stating Bismark was an economic nationalist.
Jon Murphy
Aug 10 2019 at 1:03pm
I’m glad you finally gave a definition, but that’s not a particularly good definition. Too narrow a thing; why aren’t economic sanctions (which is essentially just a tariff of infinity) considered a trade war?
Pierre Lemieux
Aug 9 2019 at 7:04pm
Jon and Todd: The Economist of this week suggests that Carl von Clausewitz, the Prussian military theorists, saw war “as the continuation of trade politics by other means.” He obviously conceived trade politics in mercantilist terms, just the way Trump and his advisors (most of whom, it appears, are lawyers and former lobbyists) think.
More generally, it is likely that governments of people who owe their wealth to trade will not want to engage in war. That seems to be what retains the Chinese government. Of course, as the current American situation shows, governments are not, to say the least, always rational.
Comments are closed.