Adam Smith was right about free trade, but he didn’t factor in national security

Trade makes us richer, but relying too much on other countries can backfire

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Adam Smith’s The Wealth of Nations is 250 years old this year and still very much part of the socio-economic conversation. Smith was a believer in the merits of free trade and a critic of mercantilism—the then-popular fashion of promoting exports, reducing imports and hoarding the precious metals emanating from this export surplus. In Smith’s view, mercantilism was definitely not the route to general prosperity.

The late Nobel Prize-winning economist Milton Friedman pungently expressed the same thought. To quote from a 1978 campus address: “The gain from foreign trade is what we import. What we export is the cost of getting those imports. The proper objective for a nation, as Adam Smith put it, is to arrange things so we get as large a volume of imports as possible for as small a volume of exports as possible.”

And Friedman’s formulation certainly has rational power. Trade is by definition a matter of exchange and surely the object of the exercise is to get the imports you want for as little as possible by way of exports. In that sense, seeking to export more than you import seems counterintuitive.

So, 250 years after the publication of The Wealth of Nations, is Adam Smith still relevant?

Often described as the father of economics, Smith believed in concepts like the division of labour; free trade; voluntary exchange; competition; the harmony of self-interest (whereby large numbers of people lawfully pursuing their self-interest will generate broadly beneficial social outcomes); dependence on market forces; and a generally limited role for government, including an antipathy towards attempts at economic micromanagement.

I think the answer to any question of Smith’s continued relevance is very much in the affirmative, albeit with caveats; or, to use one of my favourite words, trade-offs.

Smith’s vision of freer trade has brought great advantages to both developing and developed countries. Poverty has been significantly reduced in the former and consumers in the latter have gained access to a greater range of goods, often relatively inexpensive ones.

But there are potential exposures, one of which is security.

Precisely because it had a large manufacturing capacity, the United States in the Second World War was able to become what Franklin D. Roosevelt dubbed the “arsenal of democracy.” But had that capability been hollowed out by foreign competition, the situation would have been quite different. And the consequences could have been very unpleasant.

Bottom line, this calls for a rigorous assessment of a country’s trading profile from the security perspective. The details of where to draw the line will vary from situation to situation and be heavily influenced by what international role a country perceives for itself. And, of course, all sorts of entities will attempt to get themselves defined as “essential to security” and thus benefit from protection. But the fact that it’s difficult to strike the perfect balance doesn’t detract from the necessity of trying. And there will definitely be times when cheapest isn’t best.

Smith and Friedman were not opposed to exports. Quite the contrary. They both presumed that in order to acquire imports, you would have to have exports. It was making a fetish out of exporting more than you imported that they disagreed with.

Of course, for those engaged in export industries, exports become an end in and of themselves. But the broader societal perspective is more complicated. Giving (exporting) more than you are getting (importing) does not necessarily make a lot of sense.

Of course, there are exceptions.

The U.S. role in facilitating European recovery after the Second World War is a perfect example of how exporting more than you import can serve a useful political purpose.

And you can also make a case for maximizing exports to provide domestic employment while simultaneously using the proceeds of your export surplus to invest in foreign assets. Mind you, this runs the risk of expropriation/nationalization (physical assets) or default (financial assets). Meanwhile, the extent to which it maximizes general well-being is a matter of conjecture.

Like all long-dead thinkers, Adam Smith’s views were influenced by the contours of the environment in which he lived. But his fundamental insights are not obviated by the fact that the world has become vastly more complicated than it was in 1776.

To get one sense of that additional complexity, see my May 26, 2025, column Why the world still bows to King Dollar.

Troy Media columnist Pat Murphy casts a history buff’s eye at the goings-on in our world. Never cynical – well, perhaps a little bit.