Commercial Policy and Industrialization

Abstract

What I propose to do in this lecture is to survey developments in the theory and practice of commercial policy, with general reference to the potential role of commercial policy in promoting economic development, and with special reference to the question of its potential service to this objective in small developing countries such as Panama. I claim no special, or even any, knowledge of the Panamanian economy; but I have both visited and studied a number of comparably small developing economies elsewhere. I begin with a brief and impressionistic survey of the theory and history of tariffs. The mercantilist economists favoured the use of interventions of various kinds in international trade primarily as a means of accumulating precious metals for the treasure of the state, but also as a means of building up a nation's population and therefore its political and military power as then conceived-and weakening the power of other nations. The classical economists reacted against and destroyed-at least intellectually-the mercantilist view of the world, by developing two basic principles of economics. The first was David Hume's price-specie-flow mechanism, according to which in the long run a nation has no control over the quantity of the domestic money supply-which in those days was also its stock of precious metalsbecause the public can export or import money in exchange for imports or exports of domestic goods and services. (In the modern world, the same principle applies; but a nation can control the ratio of its international reserves to its domestic money supply, and therefore the amount of its international reserves, through the control its central bank can exercise over the volumes of domestic credit outstanding against its money supply. Also, the public can adjust actual to desired money supply through international transactions in securities as well as in goods and services.) The second was Adam Smith's principle of specialization and division of labour, which as applied to international trade clearly implied that free trade rather than governmental intervention in trade was the welfare-maximizing policy for a country to follow. The subsequent development of the classical theory of international trade admitted only two important exceptions to the general optimality of a free trade policy. The first was the optimum-tariff argument: the possibility that by means of a tariff a country could exploit monopoly or monopsony power and turn its terms of trade in its favour at the expense of restricting its trade volume. The logic of this possibility had