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In Trade, Argentina Must Follow Adam Smith, Not Donald Trump

By: Iván Carrino - Oct 16, 2016, 9:08 pm
(Adri Bosch) Argentina
While Argentina’s politically correct establishment claims to reject Trump, their actions say otherwise. (Adri Bosch)

EnglishBelieve it or not, Argentina is similar to the United States in one important aspect. Trump, one of the most eccentric and outlandish candidates in US political history, is calling for a reduction of imports from Mexico and China, arguing that they’re “taking away” American jobs.

While Argentina’s politically correct establishment claims to reject Trump, in practice they seem to agree completely.

Congressman Sergio Massa and his team of economists recently introduced a bill to curb imports in Argentina for 120 days. Several business unions supported the initiative.

But it’s not just the opposition and these businessmen — the new Mauricio Macri administration shares this “concern.”

A month ago, Michael Braun, the “neoliberal” secretary of Commerce, asserted that the government “will not allow an indiscriminate entry of imports.”

President Macri stated the same, noting that “jobs must be protected.”

The problem with these arguments is that they are as old as they are misguided.

Already in the late 18th century Adam Smith began to refute such mercantilist fallacies and champion free trade.

For the economic doctrine of mercantilism, the source of a nation’s wealth was its accumulation of gold and silver.

Given that precious metals were the currency at the time, countries sought to stimulate exports and restrict imports, the idea being to maintain a trade surplus that would bring in gold and silver.

 

For Smith, however, the wealth of a nation did not depend on how many precious metals it could amass, but rather on the goods and services that money could buy. In short, what benefits people is fulfilling their needs, and these are met by consuming goods and services.

Smith’s second warning against mercantilism was that a ban on imports could hardly spur economic growth.

In his magnum opus, The Wealth of Nations, the Scottish thinker wrote:

The general industry of the society never can exceed what the capital of the society can employ (…) No regulation of commerce can increase the quantity of industry in any society beyond what its capital can maintain. It can only divert a part of it into a direction into which it might not otherwise have gone; and it is by no means certain that this artificial direction is likely to be more advantageous to the society than that into which it would have gone of its own accord.”

The message is clear: when an industry thrives thanks to protectionist measures, the overall economy does not grow; it simply takes a different route than that it would have without intervention.

Imagine a society made up of five people. Two of them produce chairs, and the remaining three make tables. If the government decides to limit chair imports, chair prices will rise due to lower foreign competition.

This will create a greater incentive to produce chairs locally. Finally, what will happen is that those who previously produced tables will now manufacture chairs, resulting in a growth in the production of chairs, but a drop in the production of tables.

Obviously, this is not economic growth, but a simple shift in the structure of production.

Moreover, Smith noted that tariffs result in monopolies that operate to the detriment of consumers.

By restraining, either by high duties or by absolute prohibitions, the importation of such goods from foreign countries as can be produced at home, the monopoly of the home market is more or less secured to the domestic industry employed in producing them. Thus the prohibition of importing either live cattle or salt provisions from foreign countries secures to the graziers of Great Britain the monopoly of the home market for butcher’s meat (…) Many other sorts of manufacturers have, in the same manner, obtained in Great Britain, either altogether or very nearly, a monopoly against their countrymen.”

Replace “cattle” for clothing, and you will understand why clothing is so expensive in Argentina.

When demanding the enactment of trade barriers or a ban on foreign purchases, people often ignore the fact that the alternative is a more inefficient or less prepared production to serve the customer than a foreign one.

Adam Smith also noticed this. He suggested that nations should behave the same way a family would:

What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage.”

In the first eight months of 2016, Argentina’s imports measured in US dollars fell by 7.6 percent. However, in areas such as consumer goods and motor vehicles, the quantity imported has grown more than 20 percent. This should not be seen as a problem, but as good news.

After all, Adam Smith refuted mercantilism 240 years ago, and that was when the world began to grow at high rates, and poverty and hunger began to decline drastically.

If Argentina wants sustainable growth, it must recover Adam Smith and stop clinging to ideas championed by sorry types such as Donald Trump.

Iván Carrino Iván Carrino

Iván Carrino holds a Master's Degree in Economics and a Bachelor's Degree in Business Administration. An economics professor at Belgrano University and at ESEADE in Buenos Aires, he also works as a consultant at Inversor Global. Follow him: @ivancarrino.

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