The burden of proof is on protectionists to justify government-erected obstacles and not on free traders to justify keeping commerce free.
The burden of proof is on protectionists.
Adam Smith was born in 1723. This year he turns 300.
To celebrate, National Review Capital Matters offers the Adam Smith 300 series. An essay on Smith will appear monthly throughout 2023, written by various students of Smith’s thought. Smith’s birthday is June 16, so the essays will appear on the 16th day of each month. Daniel Klein and Erik Matson of George Mason University are helping curate the series for Capital Matters along with Dominic Pino. To read previous months’ essays, click here.
I f government officials are deciding whether to allow free trade of goods and services in their country, they might turn to Adam Smith’s 1776 masterpiece, An Inquiry Into the Nature and Causes of the Wealth of Nations. If they read competently, they will find a strong presumption in favor of a policy of unilateral free trade — that is, of free trade regardless of policies pursued abroad.
Smith saw that free trade increases the number of participants in the market. Let’s enter into Adam Smith’s situation, and say the home country is Britain.
When British officials allow it, free trade increases the number of suppliers who serve British buyers. It increases also the number of customers who are served by British producers. One effect is to deepen the division of labor — to deepen specialization — which Smith identified as the greatest source of increased output per worker. With free competition, high prices prompt replies of “no thanks” as Britons find better deals in the open market. Wasteful uses of resources are kept to a minimum. Free trade also means privileges for none.
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.
Four Possible Exceptions
Looking closely at the four exceptions reinforces the conclusion that Adam Smith was very skeptical of government-erected obstacles to trade.
The first exception is Smith’s support for using targeted trade restrictions to enhance national security. Smith explicitly reckoned such protectionism as an economic cost, even when he supported a specific restriction. As he said about one such trade restraint that he endorsed because of its contribution to British naval might, “the act of navigation is not favourable to foreign commerce, or to the growth of that opulence which can arise from it.” Trade restrictions for national-security purposes might be a cost worth incurring, but they are an exception to the rule.
Smith’s second exception arises when the government has already imposed specific, targeted taxes on the production of domestically produced items, such as leather. Smith says that, to equalize the tax burden, the government should place an equal tax on imported leather. The idea is to treat all goods and services identically regardless of their origin or destination. To not tax leather imported from Spain to match the specific tax on the production of leather in Britain would give an economically distorting advantage to leather producers in Spain. Tariffs imposed for this purpose are not meant to protect British producers from foreign competition. Such equalization is not about “picking winners,” increasing domestic employment, nursing infant industries, or helping the home country run so-called trade surpluses.
Skeptical of “Strategic” Tariffs
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.
Restoring Natural Liberty
Smith’s fourth possible exception is not about reasons to erect obstacles to trade but about undoing them. Suppose that great obstacles have been in place for a long time, protecting British producers and workers in particular industries. Smith asked this question: How quickly should the obstacles be removed? The free-trade principle answers “immediately.” Smith considers whether, instead, the removal should be gradual. The issue is one of the appropriate speed of moving toward free trade, not whether free trade is desirable or undesirable.
Smith conceded that government might wish to remove the obstacles gradually
when particular manufactures, by means of high duties or prohibitions upon all foreign goods which can come into competition with them, have been so far extended as to employ a great multitude of hands. Humanity may in this case require that the freedom of trade should be restored only by slow gradations, and with a good deal of reserve and circumspection. Were those high duties and prohibitions taken away all at once, cheaper foreign goods of the same kind might be poured so fast into the home-market as to deprive all at once many thousands of our people of their ordinary employment and means of subsistence. The disorder which this would occasion might no doubt be very considerable.
Yet after expressing some approval for gradual removal, Smith writes that, were the removal immediate, the “disorder . . . would in all probability, however, be much less than is commonly imagined.” He explained:
Though a great number of people should, by thus restoring the freedom of trade, be thrown all at once out of their ordinary employment and common method of subsistence, it would by no means follow that they would thereby be deprived either of employment or subsistence.
Smith then offered the example of the large number of soldiers discharged from Britain’s military at the end of the Seven Years War: “Not only no great convulsion, but no sensible disorder arose from so great a change in the situation of more than a hundred thousand men, all accustomed to the use of arms, and many of them to rapine and plunder.”
Two other features of Smith’s discussion of adjustment costs are noteworthy. First, to justify a more-speedy abolition of tariffs, Smith called for the elimination of government-erected barriers into professions and to the movement of workers. In the U.S. today, that would mean liberalization of occupational-licensing requirements, land-use and housing-market policies, and other interventions that increase the difficulty of switching jobs. Such reforms would ease transition to new jobs. Second, Smith identified these adjustment costs as an additional reason to avoid protectionism in the first place.
Tariffs Are Not Good Tax Policy
Smith also addressed whether tariffs might be justified, not as trade policy, but as tax policy. He is not favorable to using tariffs as a source of government revenue. He explains that tariffs violate most of his maxims of taxation.
Smith argued that taxes should be fair, certain, convenient, and efficient. Yet protective tariffs satisfy, at most, only one of these criteria: Paying tariffs is not obviously less convenient than paying other taxes. But tariffs are not fair. They transfer income from the masses to a handful of producers for no reason other than that these producers are politically influential.
Nor are tariffs certain. Tariffs will change with changes in the relative political influence of different producer groups. If today’s politically powerful ironmakers are tomorrow surpassed in political influence by iron-using plow manufacturers, protection will be withdrawn from producers of iron and given to producers of plows.
And tariffs are certainly not efficient. By shielding resources in protected industries from competition, tariffs not only dim privileged firms’ incentives to innovate, they also prevent resources from moving to other industries where these resources would produce more total economic value.
Smithians, All of Us?
A careful reading of Smith’s work reveals that Smith’s reputation as a staunch advocate of a policy of unilateral free trade is fully justified. Protectionists can find no comfort in the Great Scot’s scholarship.
There is something remarkable about Adam Smith: He is invoked today by many people across a wide portion of the ideological spectrum. People find something elevated and venerable about Smith. They try their darnedest to recruit him to their cause.
What endures through the ages is Smith’s character as a liberal in the original political sense of the term — one who holds a presumption in favor of liberty and against the governmentalization of social affairs.