I’m very pleased to have written the July essay in National Review‘s monthly series throughout 2023 to commemorate the 300th anniversary of the birth of Adam Smith – a series splendidly instigated and overseen by Dan Klein, Erik Matson, and Dominic Pino. In my essay I argue that, while Smith did indeed recognize exceptions to the strong case that he made for a policy of unilateral free trade, these exceptions give very little comfort to protectionists who argue that tariffs and other trade restrictions are tools that governments should routinely use as a means of increasing the wealth of the nation. Two slices:
Smith was not a free-trade absolutist. He explicitly identified four possible justifications for government to impose tariffs on imports. Upon discovering this fact, protectionists often trumpet it as if it’s news to economists who support free trade. It’s not. That Smith made these exceptions has been known since the first copies of the Wealth of Nations found their way into readers’ hands nearly 250 years ago. I myself learned about them more than 40 years ago in an undergraduate course on the history of economic thought.
The exceptions identified by Smith, however, are only that: exceptions. If the goal is to economically enrich the masses as much as possible, unilateral free trade should be presumed to be the best policy. The burden of proof is on protectionists to justify government-erected obstacles and not on free traders to justify keeping commerce free.
Looking closely at the four exceptions reinforces the conclusion that Adam Smith was very skeptical of government-erected obstacles to trade.
Smith’s third exception to unilateral free trade is rooted in his recognition of the frequent folly and wickedness of officials in other countries. He considers the possibility of using tariffs to induce foreign officials to lower their tariffs.
Trade restrictions imposed abroad keep the global market smaller than it would be absent those restrictions. British producers have fewer customers, and British buyers have fewer suppliers. The wealth of the nation isn’t as high as it could be.
The idea is that well-targeted tariffs by the British will harm powerful producers abroad, and, attentive to those producers, the foreign government will lower its tariffs on imports from Britain to mollify the British government into removing its retaliatory tariffs.
Smith recognized the hypothetical usefulness of retaliatory tariffs as a tool to — ultimately — advance free trade. To the extent that Smith countenances such strategies, the overarching aim is to make trade freer in the long run.
But he was pessimistic about the use of retaliatory tariffs in practice: “Revenge in this case naturally dictates retaliation.” Smith understood that foreign governments are prone to respond to retaliatory tariffs not by reducing their own tariffs, but by further raising or multiplying them. The result is trade wars. And trade wars, Smith worried, can escalate into shooting wars. Best to avoid the hubris of believing you can outthink and manipulate officials in other lands.