CHAPTER XI

ADAM SMITH'S EXCEPTIONS TO FREE TRADE

§ 1. Meaning of "Exceptions to Free Trade."1 THE term "Free Trade," as already observed, is sometimes taken in a wide sense as equivalent to the system of natural liberty in general; but in political controversy, if we look to actual history, the term has a much more restricted meaning. It is used specially in reference to foreign trade, and means the absence of differential duties (or bounties) in favour of the home products; it is in this restricted sense that Adam Smith's exceptions to free trade are examined.

"There seem, however, to be two cases in which it will generally be advantageous to lay some burden upon foreign for the encouragement of domestic industry."

§ 2. First Exception: if the Industry is necessary for Defence; the Navigation Act.

"The first is when some particular sort of industry is necessary for the defence of the country. The defence of Great Britain, for example, depends very

1 Book IV. chap. ii.

The general relations of the State to commerce are discussed in the next chapter.

much upon the numbers of its sailors and shipping. The Act of Navigation, therefore, very properly endeavours to give the sailors and shipping of Great Britain the monopoly of the trade of their own country, in some cases by absolute prohibition, and in others by heavy burdens upon the shipping of foreign countries."

Then follows the detailed account of the provisions of the Act of Navigation (1660), and the well-known eulogy already quoted on the political ideas on which it was based.

"It is not impossible that some of the regulations of this most famous Act may have proceeded from national animosity. They are as wise, however, as if they had all been dictated by the most deliberate wisdom. National animosity at that particular time aimed at the very same object, which the most deliberate wisdom would have recommended, the diminution of the naval power of Holland, the only naval power which could endanger the security of England." On other grounds it was condemned:

"The Act of Navigation is not favourable to foreign commerce, or to the growth of that opulence which can arise from it. The interests of a nation in its commercial relations to foreign nations is like that of a merchant with regard to the different people with whom he deals, to buy as cheap and to sell as dear as possible. But it will be most likely to buy cheap, when by the most perfect freedom of trade it encourages all nations to bring to it the goods which it has occasion to purchase; and for the same reason

it will be most likely to sell dear when its markets are thus filled with the greatest number of buyers. The Act of Navigation, it is true, lays no burden on foreign ships that come to export the produce of British industry. Even the ancient aliens duty, which used to be paid upon all goods exported as well as imported, has by several subsequent acts been taken off the greater part of the articles of exportation. But if foreigners, either by prohibitions or high duties are hindered from coming to sell, they cannot always afford to come to buy; because, coming without a cargo, they must lose the freight from their own country to Great Britain. By diminishing the number of sellers, therefore, we necessarily diminish that of buyers, and are thus likely not only to buy foreign goods dearer, but to sell our own cheaper than if there was a more perfect freedom of trade. As defence, however, is of much more importance than opulence, the Act of Navigation is, perhaps, the wisest of all the commercial regulations of England."

Attempts have often been made in the interests of popular ideas of unrestricted free trade to take away from the significance of this passage. But the meaning is absolutely clear, both in general principles and particular instances. The passage gives one of the best statements of the general rule in favour of freedom, and thereby makes all the more forcible the exception.

The particular reference to the aliens duty is of interest at the present time when the payment of market dues is sometimes advanced as the rationale of

general import duties. The export duties had been already abandoned to a great extent, and the general import duties were finally abandoned by Gladstone on economic grounds, which ought to be studied before the system is reintroduced.1

Adam Smith's opinion on the Navigation Act, instead of being inconsistent with his general teaching, is in complete harmony with it, as will appear in dealing with his views on national defence and imperial federation.2

It is in the assertion of the subordinate importance of opulence to defence that the real value of the whole argument on this exceptional case is to be found. If the exception is to be applied in our own times, it ought to be applied not in the letter but in the spirit; and before we seek to apply it at all, we ought to take account of the practical difficulties and of the cost; and not only of the money or commercial cost, but of the cost to the nation in weakening other elements of national strength.

It is remarkable that this very exception, which is so strongly approved of by Adam Smith on principle, affords one of the best examples of the negative argument for free trade.

§ 3. Effects of the Navigation Act.

The better opinion of the author of the standard work on economic history, namely, Dr. Cunningham,

1 In 1860 Gladstone imposed a duty of one penny per package on all goods exported or imported. It was at first estimated to yield £300,000 per annum. His reasons in support are given in Financial Statements, pp. 160, 161. His reasons for the repeal in 1863 are given on p. 372.

2 See Chapter XIV.

who, as it happens, is to be classed as sympathetic with the proposed modification of our present system of freedom from differential duties, is that as a matter of history this famous Act failed in its purpose. An interesting detail may be quoted from Dr. Cunningham. Commenting on the effects of the Act of 1660, he writes: "Indeed, in one branch of trade the measure recoiled upon its authors; the English had not a sufficient supply of ships of such burden that they could be employed in the Baltic and Scandinavian trade; and the restrictions imposed on them forced English merchants to abandon this line of commerce altogether. As a consequence, the Dutch obtained a more complete monopoly than before in the Baltic trade, which was the very foundation of their maritime power, and they could afford to relinquish the plantation trade which was at that time a somewhat small affair. On the whole, it seems that the Dutch did not suffer perceptibly during the seventeenth century." It is true that Dr. Cunningham also points out that English shipping developed enormously during the latter half of the seventeenth century, and "it is of course possible that the Navigation Act contributed along with other causes to this result. . ., but there is no sufficient proof of any direct connection between this celebrated measure and the decline of Holland." It is worth noting that incidentally the decline of Holland is largely attributed to the fact that its wealth depended so much on mere trade as distinct from industry, and thus

1 Vol. ii. p. 212.