Monday, June 27, 2005

Negotiating the application of non-negotiable principles

The Free Lance Star carries an article (unsigned) on the political conflict over the CAFTA Free Trade treaty winding its way through the US legislature. The issue is that of sugar and the author takes a pessimistic view of the likely outcome of a Senate vote. The author writes in sympathy with Adam Smith on free trade. My response makes some additioonal points about what Smith actuall proposed:

You are absolutely correct in your analysis of the complications caused by making selective exceptions to a free trade measure and your ‘suspicion’ that Adam Smith would agree with you on principle.

Looking beyond the pure analytics of economics we must take account of the political economy of promoting freer and free trade. Adam Smith was not one given to dogma and certainly understood the absolute need for change in principle and the relative need to go about instituting change with due allowance for political and practical realities.

For example, in Book IV of “Wealth of Nations”, which contains his scathing critique of the “Mercantile System”, he had this to say about the withdrawal of protection from cheaper priced goods produced more efficiently abroad than at home:

“The case in which it may sometimes be a matter of deliberation, how far, or in what manner it is proper to restore the free importation of foreign goods, after it has been for some time interrupted, is, when particular manufacturers, by means of high duties or prohibitions upon all foreign goods which can come into competition with them, have been so far extended as to employ a great multitude of hands. Humanity may in this case, require that the freedom of trade should be restored only by slow gradations, and with a great deal of reserve and circumspection. Were those high duties and prohibitions taken away all at once, cheaper foreign goods of the same kind might be poured so fast into the home market, as to deprive all at once many thousands of our people of their ordinary employment and means of subsistence. The disorder which this would occasion might no doubt be very considerable.” (WN, IV.ii.40: 468-9)

If US produced sugar is twice the world average in price this suggests a heavy dependence of land, labour and capital concentrated on US sugar production, with consequent severe disruptions to all those involved in its production, should half price sugar pour into the US in short order. Smithian Political Economy advises “a great deal of reserve and circumspection” should be applied to the transition period from when the free importation policy is announced (the principle) and when it comes into full effect.

There can be no compromise on the principle of free trade (its absence costs consumers in higher prices and it diminishes economic prosperity by the amounts of land, labour and capital tied up producing something at twice the price of foreign producers). By releasing these economic resources over time to the rest of the economy, and by diverting spending on expensive to cheaper sugar, more resources are released to the economy to purchase other goods and services, and, not to be forgotten, foreign producers of sugar from increased sales of their products to the US can now afford to buy more goods and services from the US. Overtime, both parties to free trade make real gains.

But to achieve these gains, we must also mitigate the losses in the transition period. That is Adam Smith’s true message about instigating freer and free trade.

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