Relearning Adam Smith’s Lessons on Trade

Adam Smith is often considered a libertarian icon.¹ For that, we have Milton Friedman to thank, at least in part. Unlike the more balanced take of his Chicago School predecessors, Friedman portrayed Smith as something of a free market extremist.² Friedman’s approach sparked a counterattack by scholars determined to reclaim the nuance in Smith’s ideas, and the effort to correct the record continues to this day.³

Still, as we approach the 250th anniversary of the publication of Smith’s The Wealth of Nations, there remains one area in which a misunderstanding of his work persists: international trade. Friedman, perhaps the most influential economist of the second half of the twentieth century, included trade in his caricature of Smith.⁴ But Friedman’s rendition is flawed at its core because it ignores the real basis for Smith’s antipathy to mercantilism. Smith takes issue not with tariffs per se but with tariffs as a tool of monopoly. To Smith, the interests of the monopolist are at odds with those of the general public. He sides with the public.

The Chicago School approach, in both antitrust and trade, focuses almost exclusively on benefits to the consumer. Smith cared about the effects of monopoly rents on prices, but he saw the public as more than merely a mass of consumers longing for cheap stuff. His political economy is broader than that. It’s about power. When monopolists have too much of it, the public suffers. Smith’s free trade is not freedom from tariffs; it’s freedom from monopolists.

Unfortunately, even today, the Friedman-esque focus on the consumer reigns supreme in trade policy. Yet this myopic emphasis on consumers ended up paving the way for the “the spirit of monopoly” to reenter the trading system, even facilitating the rise of a powerful and aggressive neomercantilist state. This was the opposite of what Smith wanted.

 “Free Trade” Did Not Mean “No Tariffs”

Throughout The Wealth of Nations, Adam Smith periodically uses the term “free trade,” but he does not define it. Today, we think of “free trade” as the absence of tariffs, but in Smith’s time, tariffs were a source of essential revenue to fund the government, and Smith himself was a commissioner of customs. He was not calling for the elimination of government revenue, and so, in the most commonsense terms, could not have construed free trade to mean the elimination of all tariffs (or, in Smith’s parlance, “duties”).⁵

But The Wealth of Nations is richer than that, and Smith’s insights remain relevant today. His critique of mercantilism is not directed at the existence of duties themselves but at their deployment as a tool of monopoly. He debunks the idea that a nation’s wealth is based on the amount of gold and silver it has,⁶ and he blames that wrongheaded idea for policies focused on limiting imports and increasing exports.⁷

A closer reading of Book IV of The Wealth of Nations, “Of Systems of Political Economy,” demonstrates that Smith’s free trade is the very ability to trade goods—to import and export—rather than freedom from any and all tariffs. Smith complains about the mercantilist policy of “restraints” on imports. For Smith, these restraints fall into two categories: restraints by product and restraints by country.⁸ He describes precisely what he means by restraints: “[t]hose different restraints consisted sometimes in high duties, and sometimes in absolute prohibitions. [emphasis added].”⁹ What Smith refers to as restraints are not duties per se—but rather high duties.

Crucially, Smith also believed that capital would generally stay within British borders. He writes that “every individual endeavors to employ his capital as near home as he can, and consequently as much as he can in the support of domestic industry; provided always that he can thereby obtain the ordinary . . . profits of stock.”¹⁰ That is a significant difference from today, where, since the 1970s, Wall Street has sought unfettered cross-border capital mobility and is more than happy to employ its capital as far from home as it can, if doing so maximizes returns. Friedman was, of course, also one of the chief purveyors of the view that companies’ sole responsibility is to their shareholders, not to their workers, the community, or even their home country.¹¹

Smith objects to “high duties” and “absolute prohibitions” on particular goods because the purpose of those restraints is to allow domestic producers to have the “monopoly of the home market.”¹² He offers cattle, salt, and corn as examples, specifying, however, that it is merchants and manufacturers who benefit most from this type of monopoly.¹³

But Smith also actively supports tariffs in certain circumstances, even outside of revenue generation. For example, he recognizes the importance of national defense, which is “of much more importance than opulence . . . .”¹⁴ National defense is so important that Smith supports the Act of Navigation, the British forefather of the Jones Act, which “very properly endeavours to give the sailors and shipping of Great Britain the monopoly of the trade of their own country by absolute prohibitions, and in others by heavy burdens upon the shipping of foreign countries.”¹⁵ He goes on to say that it is “perhaps, the wisest of all the commercial regulations of England.”¹⁶

Smith also addresses import restraints imposed because of “the doctrine of the balance of trade,” which he dismisses as “absurd.”¹⁷ These types of restrictions involve “extraordinary restraints upon the im­portation of goods of almost all kinds, from those particular countries with which the balance of trade is supposed to be disadvantageous. . . .”¹⁸ He offers France as an example. He criticizes the British imposition of especially high duties on French goods, arguing that the restrictions are so steep that they “are equivalent to a prohibition.”¹⁹ He goes on to criticize the “unreasonableness” of those “extraordinary restraints.”²⁰

Here again, he contrasts these types of restraints with free trade. He argues that “[e]very town and country . . . in proportion as they have opened their ports to all nations, instead of being ruined by this free trade . . . have been enriched by it [emphasis added].”²¹ Free trade is openness to imports, not the elimination of duties on imports.

Monopoly and Capture

Smith identifies a common source for both types of restraints: “the spirit of monopoly,” which, as he sees it, “originally both invented and propagated” the doctrine of mercantilism.²² He vests principal responsibility for mercantilism not with the government but with the merchant and manufacturing class. He points out that the “capricious ambition of kings and ministers” has been less “fatal to the repose of Europe, than the impertinent jealousy of merchants and manufacturers.”²³ He cites their “mean rapacity” and their “monopolizing spirit,” contending that their “interested sophistry” has “confounded the common sense of mankind” and is “directly opposite to that of the great body of the people.”²⁴

It is the power of monopoly that leads to the high duties, prohibitions, and extraordinary restraints of which Smith complains. But the monopolists cannot impose those types of restraints themselves: they need the government to do it. In a famous passage on capture, Smith goes on to lament the corrupting influence of the monopoly interest on the British government:

This monopoly has . . . like an overgrown standing army . . . become formidable to the government, and upon many occasions intimidate the legislature. The member of parliament who supports every proposal for strengthening this monopoly, is sure to acquire not only the reputation of understanding trade, but great popularity and influence with an order of men whose numbers and wealth render them of great importance. If he opposes them, on the contrary, and still more if he has authority enough to be able to thwart them, neither the most acknowledged probity, nor the highest rank, nor the greatest public services, can protect him from the most infamous abuse and retraction, from personal insults, nor sometimes from real danger, arising from the insolent outrage of furious and disappointed monopolists.²⁵

Merchants and manufacturers don’t limit themselves to monopoly power. They also understand monopsony power, especially when it comes to what they pay workers. Smith contends: “Masters are always and every where in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate . . . . Masters too sometimes enter into particular combinations to sink the wages of labor even below this rate.”²⁶

Smith considers the status of the working poor to be a benchmark for the health of the overall economy. Thus, “the scanty maintenance of the labouring poor . . . is the natural symptom that [national wealth is] at a stand, and their starving condition that they are going fast backwards.”²⁷

In looking at Smith’s critique of mercantilism more closely, it becomes clear that his main concern is not duties themselves, but the excessive power of merchants and manufacturers. They use that power to influence the government in furtherance of a monopolistic agenda. But they also use that power to suppress wages. Their interests are indeed contrary to those of the public. This is a far cry from the narrative that reduces these complex dynamics to the simple proposition of achieving the lowest possible price for the consumer.

The Gilded Age proved a textbook example of Smith’s concerns, and the eventual response reflected Smith’s solution. Robber barons like Andrew Carnegie sought tariff protection in order to increase monopoly rents. At the same time, even as Carnegie collected those monopoly rents, his hostility to organized labor manifested in, for example, the violent Homestead Steel strike of 1892.

During the Great Depression, Franklin Roosevelt ultimately followed Smith’s prescription of addressing high duties and the influence of monopolists. By 1934, a year into his presidency, Roosevelt had secured a delegation of authority from Congress to negotiate reciprocal tariff reductions; the goal was not to eliminate duties altogether but to reduce them from the high levels that had generally been part of U.S. trade policy since the mid-nineteenth century. Smith was a supporter of reciprocity to address high tariffs.²⁸ FDR was also able to advance an aggressive trustbusting agenda and to strengthen the ability of workers to bargain collectively.

After the Bretton Woods conference in 1944, the United States and other allies turned their attention to negotiating a multilateral trading system. In a paper the United States prepared for those negotiations, the Americans pointed out that it wasn’t just governments that could engage in behaviors that distort incentives in the global marketplace; the private sector, too, could do the same to “obtain the unfair advantage of monopoly.”²⁹ Indeed, U.S. negotiators felt that in some cases, the actions of the business community could be more destructive to international trade than the actions of government.

These negotiations eventually led to the conclusion of the International Trade Organization (ITO) Charter in 1948. It included a chapter on “restrictive business practices,” which established procedures for investigating monopolistic behavior. Of particular note, negotiators understood that countries could deploy monopoly in trade for anticompetitive purposes. In the 1930s, Germany used cartels and other means to try to corner the market on key military inputs; as early as 1943, Churchill recognized that the Soviet model meant that a state-led monopoly could drive market democracies under.³⁰ The antimonopoly chapter of the Charter responded by covering both private and public monopolies.

On labor, the United States had expressed concern about the ability of one country to use trade to “export unemployment,” that is, to pursue full employment for itself at the expense of others. It was the Latin American countries that specifically insisted on including fair labor standards in the Charter,³¹ with a particular recognition of the problem of suppression of labor standards in export-oriented industries.³²

The trade associations representing big corporations in the United States objected to the Charter, and it never got a vote in Congress. The General Agreement on Tariffs and Trade, with its tariff cuts, did not need a congressional vote and entered into force. The architects of the Bretton Woods trade regime, then, shared Smith’s concerns with high duties, monopolies, and wage suppression. Unfortunately, when the “rules-based order” finally emerged, the “rules” only addressed high duties, not monopolies or wage suppression.

Modern Free Trade and the Spirit of Monopoly

Rather than reining in the spirit of monopoly, modern free trade policy has advanced it. The acceleration of global free trade agreements began in earnest after the fall of the Iron Curtain, when democracy and capitalism seemed inevitable. Trade negotiations to establish what would become the World Trade Organization (WTO) had been underway since 1986. The end of Communism in Eastern Europe injected momentum into the talks, and by 1995, the WTO was established. Its rules bear little resemblance to the ITO Charter, not least because of the absence of antimonopoly disciplines or labor safeguards. The same is largely true of the 1992 North American Free Trade Agreement (nafta), with its anemic competition and labor rules.

This approach is not surprising. Friedman’s theories heavily influenced Reaganomics. At home, Ronald Reagan weakened both antitrust enforcement and labor power. It was also Reagan who launched the negotiations that would lead to the creation of the WTO, as well as the U.S.-Canada free trade agreement that later became nafta. When Democrat Bill Clinton took office, he wrapped up the talks by mostly accepting what his Republican predecessors had negotiated. Clinton later said: “We did not create the WTO so that it could impose the economic theories of Milton Friedman on the rest of the world.”³³ That is, however, largely what happened.

Decades later, the Covid-19 pandemic would unravel the consensus; by exposing the problem of supply chain concentration in geopolitically fraught places, it revealed the simple fact that the market had failed to adequately factor in concentration and strategic risk. Furthermore, increased corporate concentration at home made it even easier to offshore domestic supply chains to those geopolitically fraught places.³⁴ The trading system does not incentivize actors to factor negative externalities into cost structures, and, in an era of high cross-border capital mobility, effectively punishes those that do. Mobile capital can shift, or threaten to shift, production offshore, arbitraging labor (and environmental) regimes, and putting downward pressure on wages and standards.

Equally, Smith’s concerns about corporate capture have once again become relevant. The girth of these trade agreements has expanded, and most of the rules imposed are designed to serve the interests of big business. They operate not necessarily to open unfairly closed markets but to promote monopoly, hamstring domestic policymakers, or both. Some examples: Big Pharma uses trade agreements to extend its patent and data monopolies as long as possible; Big Tech uses digital trade chapters to lock in deregulation, just as policymakers take steps to rein in these companies; banks “too big to fail” use investment rules to make it hard to restrict cross-border capital mobility.

It is not only private monopolies, however, that the trading system has incentivized. It has also incentivized mercantilism, and in particular, strategic dominance of industrial supply chains by the People’s Republic of China (PRC). Indeed, policymakers across the political spectrum have now begun to ask the same question: How did so many of America’s vital supply chains end up in the hands of its main strategic adversary? The PRC’s brand of mercantilism has involved active intervention in the economy to promote exports and reduce imports. The era of “free trade” fueled the PRC’s efforts. U.S. commitments at the WTO left it with a tariff cap averaging just 3.4 percent. On core industrial products, such as steel and aluminum, the tariff cap is zero. Even for some advanced products, like airplanes, the tariff is zero. Producers realized they have the option of offshoring to cost-suppressing locations and then exporting back, paying little or no duty.

Worse than that, the industrial supply chain rules in regional and bilateral free trade agreements allow non-parties like the PRC to free ride, making them eligible to contribute more than half the content of the product while getting duty-free treatment under other countries’ trade deals. Those rules are in many ways designed to lock in existing supply chains, that is, to lock in the advantage of the low-cost incumbent. Often enough, that’s the PRC.

What Would Adam Smith Do?

The question for policymakers is how to correct for the problems that emerged from the recent free trade era, including a dangerously compro­mised industrial base, a hollowed-out and (justifiably) angry working class, and outsized dependence on a geopolitical rival? Defenders of the free market faith continue to press their case, meeting the moment not through policy changes but wordplay: one of Clinton’s most influential economic advisers, Larry Summers, justifies the policies of the free trade era on the basis that they constituted “good mercantilism.”³⁵ (To be sure, “good mercantilism” is not a concept found in the pages of The Wealth of Nations.)

At the same time, Summers’s defense of neoliberal trade policy should not be surprising, inasmuch as he contended that he and “any honest Democrat” would admit that the party had swapped out the philosophy of John Maynard Keynes for that of Milton Friedman; Summers even went so far as to eulogize Friedman as “the Great Liberator.”³⁶

The prescription to fix what ails us is not the thing that made us sick, no matter what you call the malady. Instead, we should borrow the structure Smith laid out and take on the problem of power by looking at trade both in terms of products and countries. We will also need to add to his mix the contemporary challenge of nontariff barriers because it is within those rules that modern monopolists look to embed their dominance.

(1) Products: Decades of “free trade” have contributed to deindustrializaton in the United States. Some cling to the argument that the problem is not trade but automation. If that were true, though, then once the American pandemic lockdown ended, product shortages would have ended too; those much needed goods would have been made by robots in factories here at home. They were not. It is precisely because those far-flung supply chains exist that, in response to the pandemic, manufacturers began shifting from “just in time” to “just in case.”³⁷

That means part of the solution will be reindustrialization. To achieve that, we should focus on ensuring we can produce core inputs, such as steel, aluminum, semiconductors, and clean technology. We should prioritize additional strategic sectors as well. In doing so, we must avoid making uninformed assumptions about what is or is not strategic: for example, textiles, often invoked as an example of a sector the United States can afford to do without, are more than just the fabric of our lives. They’re an essential component of goods that keep our troops safe.

Smith advocated aggressive policies to ensure that defense industries, such as shipbuilding, remained viable in the United Kingdom. Duties were among those policies. Similarly, duties can be a viable tool to ensure a healthy production base for targeted sectors. But tariffs alone are not likely to be enough. Importers can pay the tariffs and either absorb the increased cost, pass the cost onto consumers, or do a combination of both. None will necessarily lead to domestic investment, for which a more robust and comprehensive industrial strategy is essential. This was the theory underlying the Inflation Reduction Act and the chips and Science Act. It is also the theory underlying commercial shipbuilding legislation in the vein of the ships Act.

In certain sectors, it may make sense to partner with other countries, particularly where access to raw materials and existing industrial pro­duction are complementary. Coordinated industrial strategy, including tariffs, can provide a way to build more resilience into the trade system among partners with common goals.

(2) Countries: The PRC has succeeded in using the free trade era to advance a mercantilist agenda. Smith did not concern himself with balance of trade but with mercantilism, and applying his views today, the goal would be to address the harmful consequences of the PRC’s mercantilism, like deindustrialization, rather than targeting the trade deficit itself.

Because the PRC’s approach to trade is systemic and anticompetitive, it is appropriate to have a trade and industrial policy focused on the PRC, in addition to a trade and industrial policy that focuses on particular products or sectors. Tariffs on a broad range of Chinese imports are necessary as part of the overall effort to combat Beijing’s supply chain dominance. Vigilance on currency manipulation, enforcement of antitrust laws and forced labor import prohibitions, and continued surveillance of Chinese companies’ compliance with American securities law are also important elements of a holistic strategy.

In addition, governments negotiating trade agreements now and in the future must be cognizant of the flaws in the agreements that were concluded during the pre-pandemic free trade era. As noted above, industrial supply chain rules in those agreements tended to allow a significant amount of content to be sourced in countries that were non-parties, notably the PRC.³⁸ Such third countries act as “free riders” to deals in which other parties make commitments. Intentionally or not, these agreements embed PRC supply-chain dominance, especially of inputs. It stands to reason that any trade agreements that governments negotiate for the purpose of facilitating post-pandemic resilience should not embed the very problems they claim to be trying to solve. At present, the PRC is the dominant neomercantilist economy and this analysis is thus limited to that country. It could apply as well, however, to any other mercantilist economy.

(3) Nontariff barriers: Nontariff barriers are a contemporary chal­lenge that Smith did not confront. It is true that sometimes even friendly trading partners use nontariff barriers as pretexts for inhibiting fairly traded imports. Addressing those barriers can be a legitimate goal of trade policy.

Unfortunately, an “overgrown standing army” of lobbyists has succeeded in turning the quest to limit inappropriate nontariff barriers into a tool of monopoly. It is this excess that modern trade agreements should avoid. Traditional free trade provisions that effectively advance monopolistic goals can be found in the intellectual property, investment, and digital trade chapters of many agreements from the last forty years; the standard competition chapter template used in those trade agreements embodied the now evanescing Chicago School consumer welfare standard.³⁹

Liberation Day and Monopolies

The menu of tariffs announced by President Donald Trump on “Liberation Day” (April 2, 2025) is not what Smith would have proposed to address the flaws in the trading system. True, the purported rationale for the tariffs is reciprocity, which in principle Smith supported. But the tariffs seem to have been calculated simply by taking the trade deficit as a percentage of each trading partner’s exports to the United States.⁴⁰ Smith, as discussed above, was not concerned with trade deficits and did not believe that increasing exports and decreasing imports was a commendable policy goal. Moreover, the Liberation Day tariffs are indiscriminate; they do not seek to address competitiveness issues with respect to particular products, nor do they focus on neomercantilist trading partners. In the Rose Garden, President Trump waved about the National Trade Estimates Report (NTE); the NTE is a catalogue of nontariff barriers that, in many cases, represent the policy wish lists of modern monopolists.⁴¹

The Biden administration limited the influence of monopolists over trade policy. This effort triggered exactly what Smith described as the “infamous abuse” of “furious and disappointed” robber barons,⁴² and he was right again when he identified their ability to deploy members of the legislature to advance their cause.⁴³ Rather than reverting to the neoliberal model of doing the bidding of industry—for instance, by suspending trade talks with Canada for imposing a digital services tax after Big Tech declined to use their influence with Congress to ratify a tax deal that would have solved the problem—the current administration should hold firm against using its leverage to favor monopolists over the American people.

As Smith recognized, tariffs are not inherently bad. They can be designed to advance the manufacturing goals the administration claims are the heart of its trade policy. For example, the United States has an absurdly low tariff on automobiles: 2.5 percent. A higher tariff rate could be deployed to promote the kind of integrated North American automotive manufacturing that has been a bipartisan goal for decades: a higher rate on autos from outside North America would strengthen the incentives to manufacture autos and auto parts in the USMCA region, which benefit from duty-free treatment. Strengthening North American auto production was a significant goal of the first Trump administration when it renegotiated nafta in 2018. Now, however, the plan seems to be to tariff Canadian and Mexican auto content in order to unwind that integration, all while increasing the price of inputs and warning carmakers not to raise their prices.⁴⁴ At some point, the math simply does not work. Automakers then announced layoffs.⁴⁵

There is tariff chaos—but no serious manufacturing strategy. A more thoughtful approach would have the administration identify priority manufacturing sectors that require investment and then devise a plan of subsidies, tax policy, and tariffs to incentivize domestic production. The Inflation Reduction Act and the chips Act can be viewed as test runs as the United States rebuilds its industrial strategy muscles; with majorities in both houses of Congress, the Trump administration could take lessons learned from those programs and, drawing on Alexander Hamilton’s logic two centuries ago, look to nurture infant industries, which are particularly vulnerable to PRC neomercantilism.

Instead, the One Big Beautiful Bill undermines the Inflation Reduction Act, ceding ground on industries of the future as it boosts fossil fuel producers. It is a puzzling choice: if competitiveness is the goal and these very rich oil companies needed assistance, they could, for example, eliminate share buyback programs. On critical minerals, the plan seems to be to shake other countries down or threaten to take over them. The European Union, by contrast, is looking to begin a stockpiling program.⁴⁶

One sector the administration has focused on is shipbuilding, in light of a USTR investigation into Chinese practices following a petition filed by several unions. Trump has issued an executive order assigning a range of reports in the name of crafting a commercial shipbuilding strategy in the United States. One promising angle is the recognition that this is a sector that would benefit from congressional action on industrial policy. Still, execution will be of paramount importance; for instance, in response to the USTR investigation, the administration has proposed a foreign fee structure: that may have the perverse result of lining the pockets of a global shipping cartel.⁴⁷ To succeed, the administration will need to be sensitive to the problem of monopoly in its many forms, including consolidation that resulted from the rise of the military-industrial complex and the neoliberal allergy to antimonopoly policy.

As to Smith’s concern about labor, here, too, the administration seems to be delivering for monopolists, not the American people. The National Labor Relations Board is being staffed by those who side with monopolists over workers.⁴⁸ The International Labor Affairs Bureau at the Department of Labor, which investigates problematic foreign labor practices to counter arbitrage, has been gutted.⁴⁹ Even bipartisan concern for forced labor of Uyghurs by the PRC in Xinjiang has not been enough to prevent the State Department from compromising the ability of the United States to enforce its ban on imports made in whole or in part with forced labor.⁵⁰

On the one hand, the administration’s approach to trade is true to Smith’s in that he valued domestic manufacturing and saw tariffs as a useful tool to that end. On the other, it is a betrayal of Smith, because the administration is, at least so far, choosing to cater to the interests of monopolists over those of the great body of the people.

Reclaiming the Public Interest

Adam Smith opposed trade policies that serve the spirit of monopoly. In his time, that meant high duties, absolute prohibitions, and extraordinary restraints. In the recent era of globalization, however, as monopolies have reemerged and followed the well-worn path of capturing trade policy, it is the elimination of tariffs that has acted as the favored tool of monopoly, under the guise of benefiting the consumer through the provision of cheap goods.

Just as the consumer welfare standard in antitrust was used to lure Americans into a Second Gilded Age, so has the focus on the consumer in trade lured us into accepting as natural a model of global competition that eroded our industrial base, antagonized our workers, fostered unhealthy supply chain dependencies, and incentivized regulatory arbitrage.

This approach also facilitated the ability of monopolists to secure a host of restraints on the sovereign right of governments to legislate or regulate on behalf of the public. It is the modern manifestation of Smith’s essential concern about overmighty monopolists. Smith des­paired of ever returning to a premercantile system precisely because of the problem of corporate capture. Thanks in no small part to his own efforts, he was wrong. But in reducing The Wealth of Nations to a polemic against tariffs, we have managed to end up exactly where he did not think we should be: allowing corporate interests to wield too much influence over government and undermining the public interest as a result.

Nearly a quarter of a millennium after Smith first identified the problem, we are, in a sense, back to where he started. But just as we overcame the infamous abuse of the monopolists who prevailed in earlier times, so can we overcome them again today, as long as we recognize the true nature of the problem. It’s not tariffs: it’s power.

This article originally appeared in American Affairs Volume IX, Number 3 (Fall 2025): 39–53.

Notes