Michelle
Tiedeman
International Trade: Friend or Foe?
Introduction When analyzing trade’s effect on state behavior, it is not the mere existence of trade between countries that should be central, rather, the nature of trade that is crucial. This distinction will be explored by studying the arguments of key economic and political thinkers of both the 18th and 20th centuries. The general nature of trade, the role of national government regarding trade and security, trade's capacity to befriend belligerent nations, and finally, the influence of international economic institutions will be explored. In an attempt to present a fairly broad range of sources, this study features the ideas of four influential authors from two time periods and continents: from the 18th Century, Adam Smith and Alexander Hamilton, and from the 20th Century, John Maynard Keynes and Secretary of State Cordell Hull. My thesis is that the four authors examined actually agreed with one another on the connection between free trade and peace, despite the discordant resonance of their arguments. Due to the nature of trade in Hamilton and Smith's time, their assertions that trade had ambiguous, if not adverse effects on state behavior is equivalent to Hull's statement that trade under the auspices of international organizations ensured peace. Almost all trade, up until the foundation of post-W.W.II international economic bodies, was practiced in an opaque, unfair, and mercantilist manner. Both Keynes and Hull, who argue that trade is pacific, lived in a rapidly liberalizing environment where international organizations were gaining legitimacy and influence. Thus, the conclusion of all four authors can be modified to state that trade is pacific only when it is conducted in an open, free, and fair manner. Due to the ambiguous and problematic nature of key terms such as "free trade," "war," and "peace" this study must be qualitative. For example, which countries would one consider practitioners of "free trade?" The United States, the proverbial torch carrier of open markets and trade liberalization, maintains protectionist policies in several of its sectors such as agriculture. If we were to succeed in classifying each country according to its openness in trade, how would we tally their conflicts? Again, in the case of the United States, this is particularly problematic. Despite the active roles it has played in Korea, Vietnam, Grenada, and Kosovo, the United States has not officially declared war since entering W.W.II.
Trade's function in promoting peace or inciting conflict is an issue that exposes the fundamental antagonism between economic versus political thought. Until the mid-19th Century, the issue was addressed by the mercantilist school of thought, which focused on the political (defense-related) consequences of trade. Because wealth (or the accumulation of gold) was equated with power, international trade was regarded as a necessary evil, practiced only with the utmost attentiveness to one's partner's gains, lest they exceed one's own. In 1776, Adam Smith argued in The Wealth of Nations that the mercantilist system was futile and destructive to society as a whole. By redefining wealth and proclaiming that political influence on trade was detrimental, Smith revolutionized economic thought. For this reason it seems logical to begin our study with Smith. As a figure that personifies the school of liberal economic thought, we expect Smith to assert a direct relationship between trade and peace. On that succinct declaration we could theoretically build with the thought of more modern theorists and sculpt a conclusive study. Unfortunately, Smith fails to provide us with such a foundation. In several passages in The Wealth of Nations, Smith's readers catch a glimpse of his intellectual struggles with the issue, only to conclude in the final analysis that he was ambiguous. Despite this fact, his successors have "allowed cries of ‘free trade’ to drown out the rest of [his] teachings" (Earle, 1943: 124) by basing their policy on the idea that trade is inherently pacific. Smith was born in 1723 in Kirkcaldy, Scotland to a widowed wife of a lawyer. At the age of fourteen, Smith enrolled in the University of Glasgow for three years and attended Oxford University for the following six years. In 1751 Smith was appointed Chair of Moral of Philosophy at the University of Glasgow where he remained for 12 years teaching and writing (most importantly in 1759, The Theory of Moral Sentiments) on topics varying from economics to astronomy. At the age of 54, Smith was appointed Commissioner of Customs in Edinburgh, a position that afforded him professional contact with government officials. His direct influence extended itself to, among other areas, British taxation, American policy, and trade with Ireland (Raphael, 1985: 8-29). In Smith's eyes, foreign trade brought two distinct benefits to its practitioners: "it carries out that surplus part of the produce...for which there is no [domestic] demand... and brings back in return for it something else for which there is a demand" (Smith, 1776: 446). This expansion of the market beyond the scope of domestic demand allows for increased production, efficiency and "real revenue." It is for this reason that Smith concentrated the majority of The Wealth of Nations on criticism of trade barriers, retaliatory measures and government protection of monopolies. Although Smith does mention the connection between trade and conflict, it is far from central to his argument. Smith's struggles with this issue are apparent as he addresses the Trade War of 1672 between France and Holland. According to Smith, the high tariffs and prohibition of Dutch goods escalated because "revenge...naturally dictates retaliation," and "nations...seldom fail to retaliate" against one another in trade disputes (Smith, 1776: 467). Clearly Smith is describing a trading system that operates outside of universal standards and institutions. Instead of concentrating on the present reality, he approached the issue optimistically. According to Earle, "the feeling began to grow, now that Britain’s position as a world power seemed assured, that a more liberal policy might be initiated" (Earle, 1943; 120). Smith’s approach, then, was unique to his nationality in that period. Smith seems to have believed that conflict was inherent in the nature of states, not the practice of trade itself. It is upon the same evidence that our second author formed a decidedly mercantilist opinion of international trade. Based on numerous examples, including the Pelponnesian War and British imperialism, Alexander Hamilton asked, "have there not been as many wars founded upon commercial motives" (Hamilton, 1788: 106)? While Smith published his Wealth of Nations, Hamilton was serving as George Washington's aide-de-camp. Hamilton later became a member of the Constitutional Convention and the first Secretary of the Treasury of the United States (Kramnick, 1987: 1). These experiences lead Hamilton to approach trade from a power perspective. Where Smith saw potential, Hamilton pointed to historical evidence to the contrary. Both in his Report on Manufactures and his contributions to The Federalist Papers (particularly in Federalist No. 6) Hamilton was direct and adamant that trade disputes are a perennial source of military conflict and therefore a threat to the security of the young United States. His argument that, "the rivalships and competitions of commerce between commercial nations" are one of innumerable "causes of hostility" (Hamilton, 1788: 104-5) must, however, be examined in context. As Smith pointed out, the atmosphere of trade in the 18th Century was chaotic and predatory. Shortsighted political and private aspirations (for example, "the bigotry of one female, the petulancies of another, and the cabals of a third" [Hamilton, 1788: 105]) dictated trade practice. In addition, he argued for protection of infant U.S. industry since free trade "between the recent establishments of one country, and the long-matured establishments of another country…is in most cases, impracticable" (cited in Earle, 1943: 131). This is specifically where Hamilton’s definition of national security veers into protectionism. Where Smith limited proper government involvement in trade strictly to security-related industry, Hamilton considers the general economy vital to security interests. He argues that as foreign nations used commerce to gain dominance over each other, it is best to be self-sufficient and trade only when it is solely to one’s own benefit. Interestingly, however, Hamilton supported Smith's ideas by advocating the elimination of trade barriers between the states. In fact, Hamilton goes much further than Smith by arguing that free trade would "extinguish that secret jealousy which disposes all states to aggrandize themselves at the expense of their neighbors" (Hamilton, 1788: 108, author's emphasis). Thus, Hamilton argued on behalf of the pacific nature of free trade by arguing that it constituted a crucial ingredient in the formation of a solidified union of states. It was this same sentiment that drove the philosophies of our theorists from the 20th Century. Cordell Hull and John Maynard Keynes offered more insightful narration on the dual nature of trade. Cordell Hull reasoned that "trade relations will bring nations closer together or drive them further apart than any other, accordingly as those trade relations are fair or unfair" (Hull, 1948: 101). As we have established through the examples of Smith and Hamilton, Hull agrees that the influence of trade on state behavior depends on the way in which it is conducted. Cordell Hull was born in 1871 to a poor farming family in Tennessee. After practicing as a lawyer and fighting in the Spanish-American war, Hull was elected as a Democrat to the Sixtieth Congress in 1907. He remained in Congress, serving eventually as a Senator, until 1933 when he was named Roosevelt's Secretary of State. Hull received the Nobel Peace Prize in 1945 for his promotion of U.S. leadership, universal disarmament, non-intervention, international economic engagement, and law through some of the most dramatic years of this century. As a political figure, we expect Hull to view economics similar to Hamilton, from a power perspective. From a post-WWII perspective, however, he writes that,
John Maynard Keynes shared Hull's sentiment exactly. Not only was free trade capable of preventing war between somewhat friendly nations according to Keynes, it could actually transform belligerent nations into active and productive members of international society. He entered British public service just after finishing his university studies in 1905. In 1919, he attended the Council of Four Peace Conference at Versailles as a senior British Treasury official. It was his moral objection to the Allies' shortsighted destruction of Germany that inspired him to resign from his position and write the groundbreaking book, The Economic Consequences of the Peace. Keynes' book essentially condemned the Treaty of Versailles as an instrument of Carthaginian peace. Several of its passages foretell the repeat German uprising as a result of the Treaty's crushing punishments. The book catapulted Keynes' career almost overnight, making him one of very few economists in history to achieve such widespread popular fame and recognition. Aside from his work in the public sector, Keynes wrote extensively on his theories concerning monetary policy, employment, welfare and his criticism of uncompromisingly laissez faire economics. The culmination of his career in public service, however, was the legacy he helped create at Bretton Woods. As he had suggested twenty-five years before in Consequences, engaging Germany in trade and international organizations was the best way to prevent yet another war. Thus, the convictions that started his career also ended it; Keynes died in 1946 (Blaug, 1990: 4-9).
The Proper Role of National Government
Our theorists varied greatly on their views of national governments' role in trade. While Smith, a British citizen just prior to the peak of British hegemony, believed government to be completely superfluous to a properly functioning system of trade, Hamilton, an early American, argued the opposite. In the interest of national security, Hamilton believed national government played a vital role in the regulation of trade. Finally, Keynes offered insight into the paradox of liberalism, or the tendency of a democracy (political liberalism) to limit its liberal trade practices. While the public must lead democratic governments, Keynes warned that public opinion does not always encourage wisdom and prudence. Adam Smith's disdain for government involvement in all but a few, distinct areas is expounded throughout his works. For example, he commented with regard to the investment of private capital that, "every individual...can, in his local situation, judge much better than any statesman or lawgiver can do for him" (Smith, 1776: 456.). Not only does Smith find no place in private business for the intervention of government, Smith limits "the sovereign's" necessary functions to the following three tasks:
The order of Smith's limitations is somewhat telling. We are particularly interested to know what Smith included under the first designation. As we will soon see, Hamilton included the protection of domestic industry into this category. We sense the importance of defense when Smith observes that, "as defence...is of much more importance than opulence, navigation regulations are the wisest of all the commercial regulations in England" (Smith, 1776: 465). If taken out of context, such a statement could be expected from a staunch mercantilist, not the original liberal! Firstly, Smith made this statement as a single concession to government involvement in trade. In his analysis of Smith, Edward Earle points out that, although Smith believed that "the material prosperity of the nation…[was] founded upon a minimum of governmental interference…[he] was willing to concede that this general principle must be compromised when national security is involved" (Earle, 1943: 118). After repeatedly citing the inefficiency and corruption of government-supported monopoly, Smith admits that national security is the only area where he believed government regulation to be prudent and effective. Secondly, we must consider the political environment of that time. Earle describes the mercantilist state to be "protectionist, autarkic, expansionist, and militaristic" (Earle, 1943:118). It is no wonder, in a world full of such states, that Smith was particularly wary of "dual-use" sectors such as shipping. As warships were simultaneously the most efficient means of trade and the premier weapon of war, it was unthinkable to allow foreign ships to effectively surround Great Britain under the pretense of commerce. To this day, such activity would be highly unusual. The issue of government protection of society assumes another dimension in Hamilton's eyes. His Report on Manufactures was written in response to Congress' request for information regarding the economic independence and security of the young United States. In particular, Congress wanted to ensure that U.S. military equipment and other vital goods would be secure (not dependent on a foreign sources) at all times. The nature of 18th Century trade coupled with U.S. economic weakness led Hamilton to mimic, "the bounties, premiums, and other artificial encouragements, with which foreign nations second the exertions of their own citizens," (Hamilton, 1791: 266) in order to boost a domestic manufacturing sector. If the United States were to succeed in the 18th Century, he reasoned, it had to play the mercantilist game. In direct reference to Smith, Hamilton stated that, "if the system of perfect liberty to industry and commerce were the prevailing system of nations," the United States would not be in such great need of a manufacturing sector (Hamilton, 1791: 264). In such an environment, the United States could safely specialize in agriculture and simply trade with a European manufacturing country to the benefit of both parties [2], just as Smith suggested. As an economist, Smith focused on potential; Hamilton based his political policy in accordance with the current reality. Because mercantilists believed economic affluence to be vital to the maintenance of power, Hamilton could not separate the government’s role into exclusively economic or political realms. In order for the state to protect society, it must be involved in securing economic dominance over other states. One way it could achieve this, he reasoned, was by bolstering the manufacturing sector within an agricultural economy. Hamilton argued that in the real world, agricultural economies are disadvantaged for a few reasons. Firstly, "the foreign demand for the products of agricultural countries is, in a great degree, rather casual and occasional, than certain or constant" (Smith, 1776: 262). Secondly, the productivity of agriculture is dependent on several uncertain variables such as weather. Diversification of the U.S. economy would help even out the inconsistencies in each sector, insuring an average GDP every year instead of extraordinarily high or low GDP some years. In effect, Hamilton modified Smith's division of labor argument to fit his interpretation of trade in his time. Although he agreed that the division of labor is worthwhile domestically, entire nations could not safely concentrate their production in a single sector. Doing so would be to place the production of vital goods entirely in the hands of foreign powers.
Keynes' approach to the national government is similar to Smiths' in that the current reality bore no resemblance to his ideals. In Economic Consequences of the Peace we get an accurate sense of everything Keynes found unacceptable about the statesmen of his time. In his description of the Council of Four Peace Conference at Versailles, he criticizes each leader's shortcomings that prevent him from achieving essential and proper objectives. Statesmen are repeatedly portrayed as naïve, greedy, shortsighted, and deceptive. The first obstacle Keynes identifies is blind nationalism. Georges Clemenceau (twice premier of France 1906–9 and 1917–20) he says, "had one illusion--France; and one disillusion--mankind" (Keynes, 1919: 21). And later, he claimed the French statesman believed that "nations are real things, of whom you love one and feel for the rest indifference--or hatred" (Keynes, 1919: 21). Without consideration of regional welfare, individual nations are destined to incite conflict. Furthermore, Keynes mentions the Treaty was "the policy of an old man, whose most vivid impressions and most lively imagination are of the past and not of the future" (Keynes, 1919: 23). Without an optimistic, forward-looking approach, he argues, leaders are bound to lose sight of the long-term goal of regional stability and universal improvement. In his characterization of Wilson, Keynes repeatedly criticizes the naiveté with which the president approached the treaty. Despite the fact that "never had a philosopher held such weapons where with to bind the princes of this world (Keynes, 1920: 24)," Wilson lacked the cunning quality of which Smith spoke. Wilson was, "not a hero or a prophet…not even a philosopher…lacking that dominating intellectual equipment which would have been necessary (Keynes, 1920: 25)" to effectively securing a workable and equitable peace in Europe. Furthermore, Keynes believed Wilson to be far too concerned with doing "what was not honourable…[or] not just and right" and allowed himself to be fooled into accepting a draft of the treaty that cloaked covert vengeance in "the august language of freedom and international equality" (Keynes, 1920: 33). We gain a better idea of Keynes' ideal national leader from his portrayal of public opinion as a spoiled, irrational child. He notes that because the public elects its statesmen in a democracy, leaders are obliged to, "talk as much folly as the public demand and to practice no more of it than is compatible with what they have said" (Revision, 1922: 1). According to Keynes, a certain amount of dishonesty is necessary to maintain popularity while doing what is truly best for society. Simply put, Keynes believes democracies are prone to fits of extremism; it is the statesman's job to be far-sighted when the public is not--to remain aloof and aware of long-term consequences of short-term passions. Keynes' statements are in response to public outcry after W.W.I for the absolute destruction of Germany. In effect, the public was demanding (and ultimately received) the ruin of its own economy due to the Europe's profound economic interdependence. Keynes argues that, although democratic leaders must necessarily respond to public demand, the public opinion was not in their own best interest. As an elitist, Keynes argues that it is the leader who must regardless of public opinion, protect the domestic economy by establishing free trade. It is the Council of Four's failure to do this that provokes so much criticism in his work.
On Befriending Adversarial States
If free trade is pacific, it must not only promote long-term peace between friendly nations; it must also be capable of repairing bad relations between states. It must, through increased interdependence, divert state behavior away from the path toward war. In this century we have gained the examples of W.W.I and W.W.II in support of this hypothesis. Keynes' Economic Consequences of the Peace is one large argument in support of it. Breaking the German economy and preventing its integration into the world trading system increased its belligerence. When a nation cannot improve its economic situation of, "unemployment, want and misery" due to sanctions placed on it by its neighbors, it "falls an easy prey to dictators and desperadoes" (Hull, 1948: 364). Because no extensive economic bonds have been established between neighbors, there is little to lose, and self-respect to gain. Smith refers to belligerent states in his discussion of standing armies. Although the section aims at promoting the merits of standing armies over the employment of mercenaries, he makes the following interesting observation: "as it is only by means of a well-regulated standing army that a civilized country can be defended; so it is only by means of it, that a barbarous country can be suddenly and tolerably civilized" (Smith, 1776: 706). Again a man of his times, Smith asserts that military force--not commercial interaction--is the most effective means by which to "tame" a belligerent neighbor. The use of the term "suddenly," however, implies that Smith saw military action as a rash, short-term measure. Parallel to this idea, Cordell Hull supported the idea of an "international agency...which can--by force, if necessary--keep the peace among nations" (Hull, 1948: 1638). It seems, despite his assertions that the elimination of "bitter economic rivalry [by increasing] commercial exchanges among nations over lowered trade and tariff barriers...would go a long way toward eliminating war itself," (Hull, 1948: 84) Hull is not convinced that trade alone is expedient enough. He believed that in cases of war and abrogation of international law, economic engagement was not effective or advisable. Thus, the use of trade in befriending belligerent states presupposes peace as well as patience for slow, long-term change. This does not mean Hull doubted the ability of trade to positively transform relations between states. He writes, after the adoption of the Reciprocal Trade Agreements Act of 1934[2] that, "nations that entertained and expressed bitter resentment against us became our friends" (Hull, 1948: 363). Hull refers to unfair trading practices such as the Smoot-Hawley tariff Act, as "economic warfare" and asks, "how could we promote peace with [foreign nations] while waging war on them commercially" (Hull, 1948: 355)? Hull admits that the Trade Agreements Act, which substantially loosened the Smoot-Hawley Act, did not prevent war per se; "but it is a fact that war did not break out between the United States and any country with which [it] had been able to negotiate a trade agreement" (Hull, 1948: 365). It is with similar sentiment that Hamilton prescribes a commercial union between the states. In Federalist 6, Hamilton praises the following quotation: "neighboring nations are naturally enemies of each other, unless their common weakness forces them to league in a confederate republic, and their constitution prevents the differences that neighborhood occasions" (Hamilton, 1788, 108). His argument centers around the idea that this "common weakness" is often economic, that states go to war due to mutual fear and weakness. Because Hamilton, just as Smith, believed conflict to be inherent to the nature of states, trade barriers had to be extinguished in order to avoid repetitive conflict. Keynes prescriptions for post-W.W.I Germany follow this same line of thought. Each suggestion (settlement of inter-ally indebtedness, revision of reparations claims in the Treaty, the procurement of an international loan, and rebuilding Germany's relationship with Central Europe and Russia) aims to insure Germany's long-term economic stability, not short-term punishment. [3] As we will discuss later, it is this allowance for ongoing negotiations, not quick answers that Keynes envisions for international economic organizations. Just as easily as we found Smith’s support of military action to cultivate states, we can find arguments in Smith’s writings that advocate the utility of trade as a tool of instituting good government. In his discussion of Europe after the fall of the Roman Empire, Smith mentions that,
In the long-term, trade, not military oppression, brought about real political and social change in this case. Yet another place where Smith rebuts his own argument on the utility of force in cultivating belligerent states is in his discussion of colonies. We sense throughout his work that Smith finds slavery and colonialism to be, at the least, unfortunate. In fact, one of the few places he deems government intervention to be useful is in "the protection of the magistrate" of slaves (Smith, 1776: 587). Along the same lines, Smith addresses European imperialism that resulted in the "misfortunes" of colonized nations. Smith suggests almost hopefully that, "the natives of those countries may grow stronger, or those of Europe may grow weaker…inspiring mutual fear [that] can alone overawe the injustice of independent nations into some sort of respect for the rights of one another" (Smith, 1776: 626). What is interesting about this idea is Smith’s mixture of power with economics. After stating that mutual fear is the only prevention of injustice between states, he writes that,
Thus, Smith believed that trade is capable of establishing international justice in the long term.
The Role of International Institutions
The role of international institutions in the promotion of fair trade is an issue that necessarily dates our authors. It is not surprising that the authors who lived to witness the formation of international institutions have the most to say about them. The 18th Century world of Smith and Hamilton simply did not provide the necessary environment for such organizations. In fact, neither Smith nor Hamilton seriously considered their formation. Smith comments despairingly in his discussion of retaliatory trade disputes that, "where there is no supreme legislative power nor judge to settle differences, we may always expect uncertainty and irregularity" (Smith, 1766: 339). The League of Nations, founded in 1918, was the first of many formalized bodies that would have astonished Smith and his contemporaries. The League, however, was never intended as a "supreme legislative power" and proved weak for several reasons. Most importantly, Article V of the League’s charter established the policy of unanimity for all member nations, establishing, according to Keynes, "an almost fatal bias towards the status quo" (Keynes, 1919: 164). Despite intellectual, humanitarian and even economic branches within the League, its exclusion of Germany for all but seven years (1926-33) rendered its efforts halfhearted. The backbone of the League’s charter was the creation of safeguards against war between member states as well as member vs. non-member conflicts. Although ultimately unsuccessful in this endeavor, the foundation for more comprehensive treaties was laid. In Keynes’ sequel to Consequences, A Revision to the Treaty, he places impressive confidence in the League’s potential in his statement that, "the wisdom of the world may yet transform [it] into a powerful instrument of peace" (Keynes 1919: 165). His goal is the revision of The Treaty of Versailles within the framework of the League of Nations, despite the fact that the treaty itself was penned only by a select few powers. Furthermore, Keynes prescribes the implementation of a European "free trade union" to be governed by the League (Keynes 1919: 168). Despite his failure in accomplishing these objectives, we see firstly, his tendency to pursue multilateral policy and secondly, his concentration on the economic issues of peace. Keynes’ activity in the transition to peace after W.W.II, specifically through the Bretton Woods conference, further demonstrates his conviction of the vital role of international economic organizations. His role at Bretton Woods as a British representative was most importantly aimed at the establishment of long-term economic institutions (Blaug, 1990: 9). He wrote, "after the last war the most dreadful mistakes were made. It is with some emotion that I find myself today…try[ing] to birth an institution which may play a major part in restoring the devastation of a second war, and in bringing back a life of peace and abundant fruitfulness" (Keynes, 1944: 100). The International Monetary Fund and The International Bank for Reconstruction and Development (later known as the World Bank) followed Keynes’ reasoning that, "economic international institutions …are the best hope of a new order of peaceful intercourse between nations" (Keynes, 1945: 450). Keynes’ legacy continues today, along with the WTO, to ensure economic stability through consistent dialogue, 53 years after Keynes’ death. Similar belief in the potential of international institutions can be found in the writings of Cordell Hull. In his late 1936 address to a conference in Buenos Aires, Hull outlined his "Eight Pillars of Peace," which was an enumeration of U.S. objectives just before W.W.II. The list included the following points pertinent to our discussion:
Despite U.S. refusal of League membership, Hull’s speech expounds the importance of involvement in the international arena. He goes on to pen his regret that U.S. partisan politics had played a decisive role in the defeat of the League initiative (Hull, 1948: 124). Hull’s relief in 1944 that "both major political parties were…resolved…that a United Nations organization should be founded to keep peace, by force if necessary, and that the United States should not only be a part of it, but also take her share of the leadership in creating and maintaining it" (Hull, 1948: 1699) is palpable. Hull chose to close his memoirs with the statement that, "no other achievement can be higher than that of working in harmony with other nations" (Hull, 1948); it was this dedication to the prevention of war through international institutions that earned him the Nobel Peace Prize for 1945.
Conclusion
Trade, according to our theorists, has two faces. It can be used as a tool against one’s trading partner or as a mutually beneficial method toward society’s improvement. Depending on how it is practiced, trade can befriend estranged nations or widen the gap that separates them. Despite the inherent conflict between economic and political thinkers, the writings of two politicians and two economists agree: free trade—as defined by international institutions—fosters peace. In the same century, Adam Smith and Alexander Hamilton reached seemingly opposite conclusions about the effects of trade on state behavior. Smith, an optimistic economist and citizen of the immense British Empire, focused first on the merits of free trade and then on the mercantilist reality that prevented the benefits he guaranteed. Hamilton, in contrast, was attempting to build a nation in that same hostile environment. His policies, despite his underlying theoretical support for free trade, were formed in reaction to the typical practices of his time. In fact, Hamilton’s hypothesis that manufacturing nations tended to be wealthier and more powerful, proved accurate. Today there is a marked economic and political split between the industrialized, technologically advanced global north and the comparatively poor, agricultural south. Two centuries later, John Maynard Keynes and Secretary of State Cordell Hull both advocated the adoption of free trade and the establishment of international organizations with the intent of at last, stabilizing the global economy. It should not be assumed that every theorist in 20th Century society agreed with these two men; historical evidence to the contrary was plentiful. Theirs was a belief that "fair trade," a concept not yet realized, was capable of befriending estranged nations and preventing war. Its prerequisite was the election of enlightened leaders both domestically and internationally by war weary populations. Today’s leaders cannot claim to lack evidence of the effectiveness of international institutions such as the WTO. The success of the European Union alone would have been unthinkable fifty years ago. The world has come a long way toward preventing war through the development of international law. Continued strides in this direction depend, as before, on the appointment of enlightened national leaders who value the long-term improvement of all nations through engagement in multilateral economic organizations.
[1] Smith's discussion of Europe after the fall of the Roman Empire examines "how the commerce of the towns contributed to the improvement of the country" (Smith, 1776: 411). While his discussion dealt with domestic commerce, Smith's discussion of manufacturing towns could also represent industrialized, modern states as opposed to the "country," or agrarian nations. The result of trade between the two can, therefore, tell us something about how Smith viewed trade between two different types of economies. Smith sees only benefit from their exchange due to their increased productivity as a result of their perfect division of labor. Firstly, he argues that towns provide a "ready market for the rude produce of the country," thereby giving "encouragement to its cultivation and further improvement" (Smith, 1776: 411). Secondly, townspeople often buy rural land and actively improve it. Lastly, "commerce and manufactures gradually introduced order and good government, (Smith, 1776: 412)" as we have already discussed. Hamilton's writing is in direct contradiction to this claim. Mercantilist policy can be reduced to one main fear: the benefit of one's partner greater than to oneself. Hamilton reasoned that because diversified economies are more stable, "there is always a higher probability of a favorable balance of trade," and manufacturing economies "are likely to possess more pecuniary wealth, or money, than those of the latter" (Hamilton, 1791: 283). With this statement, Hamilton completely dismisses Smith's definition of real wealth. back
[2] The RTAA of 1934 gave negotiating authority to the president in bilateral agreements for reciprocal tariff reductions. The act, through subsequent amendments allowed the United States to take part in the first five GATT rounds. Such temporary negotiating authority is commonly referred to as fast track. back
[3] This debate is especially significant in the post-Cold War world. In the case of post-Gulf War Iraq, for example, our theorists’ discussions address a number of issues. Military action was taken with the justification that Iraq had broken international law by invading Kuwait. Cordell Hull, with his belief in the sanctity of international law, would have supported this action; the United States, for whatever underlying reason, was enforcing international law in the region. However, peace has not been established, nor trade reinvigorated since the conflict. Almost weekly, skirmishes between U.S. planes and Iraqi missiles are reported. In addition, prolonged, harsh UN sanctions have degraded the Iraqi economy, causing one of the region's most progressive countries to collapse. Such sanctions are a perfect example of short term punishment of a belligerent nation. For these reasons, reintegration into the world trading system has not yet begun, almost a decade after the official end of aggression. One can draw a parallel with post-W.W.I Europe, with the only distinction that Iraq's belligerent leader remains in power and Iraq’s condition has little immediate effect on those who penalize it. Keynes warned, however, that "nothing can…delay for very long that final civil war between the forces of reaction and the despairing convulsions of revolution" (Keynes, 1919: 170); as long Iraqis suffer as a result of international sanctions, the region risks repeat conflicts and long-term regional instability. back
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