In 1776 Adam Smith wrote in his "Wealth of Nations"
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.
The underlining is mine.
Trade is by definition the exchange of different commodities of equal value, and this is what Adam Smith refers to in his defense of free trade vs mercantilism. Adam Smith was a moral philosopher - the term economist was yet to be coined - and from a moral-philosophical point of view his thesis makes good sense. In practice, however, it has invariably been mercantilism which has propelled nations to prosperity and created those advantages which Adam Smith assumes to be phenomena of moral logic.
Adam Smith, and later David Ricardo, lived and wrote in agrarian times and were mainly concerned with the British Corn Laws which imposed prohibitive import duties on cheap foreign grains, a policy greatly favored by England's land owning classes who also happened to control Parliament. This kept food prices high and landowners comfortably rich, but in time it would come to affect required living wage levels in the factories of the nascent industrial revolution.
The rapidly growing class of industrial capitalists wished labor costs to be as low as possible, so as to develop export markets for their products. When these newly rich industrialists and tradesmen finally gained the political upper hand, the Corn Laws were abolished in favor of a new form of mercantilism, this time bent on protecting industrial export markets through monopoly corporations which became the backbone of the now defunct British Empire.
Industrialization has always been the driving force behind national economic development and wealth creation, and in every important instance it has been the consequence of mercantilism, the economic doctrine which states that government control of trade is of paramount importance to the prosperity of a nation, in particular by demanding a positive balance of trade. Thus, modern economic globalization began with England's industrial revolution.
In no small degree, British mercantilism lead to the American Revolution and the creation of a new nation which promptly adopted similar policies, in reverse. High tariffs on imported goods were the main source of U.S. Federal revenue from 1790 to 1914, often exceeding 90% of total revenues collected. Behind these tariff walls and aided by abundant cheap immigrant labor and bountiful natural resources, thus arose the world's mightiest economy. The United States ran consistent surpluses in foreign trade through the 1970s and was an ardent free-trade advocate. The country has since become a substantial net importer and a less enthusiastic economic globalizer.
Nascent Germany under Otto von Bismarck was an early adherent to the American form of mercantilism and has basically stayed on track to this day, favoring policies of substantial foreign trade surpluses to the detriment of its partners in the European Community, from which Germany now demands commensurate punishment for not being able to pay their bills. Japan chose a similar course and was not so long ago considered an invincible economic force.
Brazil started to stir in the 1950s, adding a new twist to barriers against imports, namely national content laws with the purpose of provoking inwards transfer of foreign capital and industrial know-how. China did the same a generation later, adding numerous other non-tariff barriers as well as foreign exchange rate manipulation to their bag of mercantilistic tricks.
Unfortunately, global free trade is an illusion except in the minds of moral philosophers. In the real world it is most ardently bandied about by trade surplus nations - the mercantilists - that have everything to gain from free and unfettered access to everybody else's markets.
That is not to say that trade is not advantageous - of course it is - so long as it is clearly for the reciprocal enrichment of the trading parties involved. This is patently what Adam Smith alludes to in the passage quoted above.
But a system of world trade based on a number of nations running consistently large trade surpluses - the hallmark of mercantilism - must necessarily lead to a number of nations running up equally large and negative balances of trade, financed by the creation of excess, and ultimately irredeemable, credit.
Exactly where we find ourselves today.
