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Adam Smith makes a case for higher tariffs — but it doesn’t work for Trump’s trade policy

The father of classical economics, defends tariffs, but only when they force others to agree to free trade

- July 11, 2019

In his news conference in South Korea on June 30, President Trump again claimed his tariffs on China were good because China was paying for them rather than the United States. In his recent proposal for tariffs on Mexico, Trump argued tariffs would force Mexico to secure its border. Trump sees tariffs in zero-sum terms, as a means of gaining advantage over adversaries. This is a time-honored way of thinking about tariffs, but it is one that has lost ground over the past couple of centuries, as economists built on the ideas of Adam Smith and David Ricardo to come to a new understanding of international trade. If Smith were alive today, what would he think of Trump’s policies?

How should we evaluate Trump’s trade policies?

Using tariffs for economic advantage is not unique to the Trump presidency. In the 17th century, thinkers who favored mercantilism began to argue that countries should use tariffs to achieve an “overbalance of trade” so that they would export more than import and, therefore, increase their national wealth. Tariffs were designed to discourage citizens from buying other countries’ goods. The benefits and defects of tariffs were a topic of intense argument among economists, philosophers, and statesman — including Smith, the father of economics.

Smith was an 18th century professor of moral philosophy who also wrote the first book on modern economics, “An Inquiry in the Nature and Causes of the Wealth of Nations.” Much of his argument is a defense of free trade, claiming mercantilism, especially the implementation of tariffs, impedes national prosperity. Smith advances many arguments undercutting mercantilism such as: expanding markets to increase the division of labor, arguing against colonialism and exposing the negative effects of tariffs.

Yet Smith’s theory is more complicated than is often understood. He is famous for his metaphor of the invisible hand, and is sometimes interpreted as an advocate of laissez-faire policy, under which markets should be left alone. Instead, Smith’s argument touches on the potential dangers and benefits of tariffs. Smith teaches that tariffs can be used to achieve freer markets but warns that they often fail. When used to restrict markets, tariffs curb national prosperity.

How the Chicago School changed the meaning of Adam Smith’s ‘invisible hand’

Tariffs impose harm when they limit markets

Smith discusses this problem at length and warns that this kind of tariff policy results in politicians levying a “monopoly against their countrymen.” He lists several dangers of tariffs, suggesting they do not increase industry but redirect it, prevent efficient allocation of goods in the market, increase the cost of consumer goods and create zero-sum gains in the domestic economy.

However, sometimes they may be merited

However, in a section titled “Of Restraints upon the Importation from foreign Countries of such Goods as can be produced at Home,” Smith makes the following surprising statement:

Smith advocates retaliatory tariffs! This statement is rarely quoted because it represents an exception to his many warnings against tariffs. After railing against them for over 30 paragraphs, Smith offers the possibility that tariffs might be deployed by a statesman for good — namely, to repeal trade restrictions and create a freer market overall. Trump made similar arguments in fall 2018 about imposing tariffs on China, and initially, many thought the strategy was effective. Many have since argued that the tariffs have not realized the promised economic gains.

In the following paragraph, Smith qualifies his argument for the potential benefit of retaliatory tariffs:

Trade wars are hardly a specific science. Which is why Smith says they belong to the trade of politicians rather than a legislator. Still, he notes two criteria for their implementation:

  • {‘type’: ‘text’, ‘content’: ‘Tariffs should be used only to create freer economic policy.’, ‘_id’: ‘Y7X67XQJK5FGPFOSXZ2Z26PEW4’, ‘additional_properties’: {‘comments’: [], ‘inline_comments’: []}, ‘block_properties’: {}}
  • {‘type’: ‘text’, ‘content’: ‘Tariffs should be used with great caution.’, ‘_id’: ‘SX3XIVUXXNGBJF63HRJ6LDI5LI’, ‘additional_properties’: {‘comments’: [], ‘inline_comments’: []}, ‘block_properties’: {}}

Smith does not provide a defense of Trump’s tariffs

Smith argues tariffs should be used only to extend markets — one of his principles of the natural liberty of the market. Restricting markets limits potential gains from commerce because the division of labor and exchange work best when more individuals can participate. Trump’s policies use tariffs to enforce closed, secure borders.

Furthermore, Smith argues tariffs should be implemented only if they can be repealed. Otherwise, they are likely to fail in liberalizing trade and instead escalate the trade war. This will harm economic prosperity and the wealth of nations because the restrictions benefit some citizens at the expense of others who will have to pay more for their goods to compensate for the tariffs.

Smith’s theory could be employed to defend retaliatory tariffs, as long as they have the goal of getting another country to reduce their trade restrictions. This is a version of what international political economy scholars call a policy of reciprocity. However, in the end, Smith is highly cautious about tariffs, suggesting they can be beneficial if used to achieve a freer economy but they are as likely to fail as to succeed, stunting economic growth.

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Brianne Wolf is assistant professor of political theory and constitutional democracy at Michigan State University.