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Happy 244th Birthday “An Inquiry Into the Nature and Causes of the Wealth of Nations”

On this date – March 9th – in 1776 Adam Smith’s An Inquiry Into the Nature and Causes of the Wealth of Nations – was first published. I mark this happy anniversary by doing my best, in my latest column for AIER, to clear-up a misunderstanding about Smith’s attitude toward protectionism. A slice:

The first exception [that Smith mentioned to a policy of unilateral free trade] – national security – is not an economic exception at all. Yes, protective tariffs might be advisable in limited circumstances to maintain military readiness. But Smith was clear that such protection is a cost. Although security against foreign invasion is unquestionably important, protectionism carried out to further this security “is not favourable to foreign commerce, or to the opulence which can arise from it.”

The second exception – equalizing taxes – is also not really an exception. A policy of free trade is one in which the home government treats the sale and purchase of all goods and services identically, regardless of where they are produced. Smith argued that if the home government taxes the domestic production of some particular goods, then failure to impose identical taxes upon the sale of imports that compete with those domestically produced goods would give an artificial – and, hence, economically distorting – advantage to the imports.

The third exception – using at home what are now known as “retaliatory tariffs” in the hope of inducing tariff reductions abroad – is indeed a genuine exception. But no sooner did Smith mention this exception and its possible benefits than he cast doubt on its advisability. He called the typical government official who in practice would determine if retaliatory tariffs stand a good-enough prospect of working an “insidious and crafty animal.” Such a person is hardly the sort to be blithely trusted with power to obstruct trade. Furthermore, Smith thought it important to explicitly observe that the domestic citizens who bear the brunt of the very real costs of retaliatory tariffs are seldom the same domestic citizens who would benefit from any resulting reductions in tariffs by foreign governments.

The fourth exception – shielding workers in protected industries from sudden and unexpected economic disruption – is, like each of the first two ‘exceptions,’ not really one. Not only do such tariffs not promote industry and growth, these tariffs should be reduced until they are eventually eliminated. Fearful that too-quick and drastic liberalization of trade might unduly harm workers in protected industries, Smith was willing to tolerate the temporary continuation, but at falling rates, of some tariffs. Smith thought it to be a matter of justice to workers, despite any resulting reduced economic growth, for government to reduce existing tariffs gradually – tariffs that, Smith is clear, should never in the first place have been imposed.

One may agree or disagree with Smith on any or all of these so-called “exceptions.” But one cannot legitimately identify Smith’s own discussion of these “exceptions” as reason to doubt that he strongly believed that maximum widespread prosperity and justice over the long run are best ensured by a policy of unilateral free trade.