What Did Adam Smith Think of Tariffs?

Are tariffs sound economic policy or a blunt force negotiating tool?

By Chuck Warren

Last week, President Trump announced tariffs on all countries in the world. Oh boy, as Bill Murray famously quipped in Ghostbusters, "Human sacrifice, dogs and cats living together... MASS HYSTERIA."

The stock market took a huge dip. People warned of recession, inflation, and even stagflation. Cable news went so far as to claim that it was the end of the American world order. And in Trump-like fashion, the President today announced a 90-day pause on tariffs except on Chinese imports, which is probably going to become permanent but for the better. Here’s what has happened over the past week.

• Israel was the first to drop all tariffs on U.S. imports.

• The European Union, the world’s second-largest economy and the largest U.S. export market, proposed reciprocally zero tariffs.

• Taiwan offered the same thing, and so did countries from Vietnam to Zimbabwe.

Secretary of the Treasury Scott Bessent says the United States has "70 negotiations lined up" on tariff negotiations. These countries have offered to negotiate lowering or zeroing tariffs on U.S. imports.

There are two ways to look at tariffs.

One is that they are good within themselves, that they are good economic policy, and few economists believe this theory. Frankly, neither do I.

There’s a second way, which is that they are a tool toward another objective.

Adam Smith, the patron saint of capitalism and free trade, believed the second. He mentioned as an example that, in 1697, England prohibited importing bonelace from what is now Belgium, at the time under Spanish control. Spain retaliated and banned imports of woolen products from England. Three years later, both sides agreed to drop these bans.

Smith cited the Spanish disruption of trade as a good example because it led to freer trade. He wrote:

There may be good policy in retaliation of this kind, when there is a probability that they will procure the repeal of the high duties or prohibitions complained of. The recovery of a great foreign market will generally more than compensate for the transitory inconvenience of paying dearer during a short time for some sorts of goods. To judge whether such retaliations are likely to produce such an effect, does not, perhaps, belong so much to the science of a legislator, whose deliberations ought to be governed by general principles which are always the same, as to the skill of that insidious and crafty animal, vulgarly called a statesman or politician, whose counsels are directed by the momentary fluctuations of affairs.

This is what Trump is moving toward. Tariffs will hurt American consumers in the short term, but if they succeed in abolishing barriers to U.S. exports, leading to an agreement that both the United States and foreign governments abolish these barriers, it will benefit both U.S. consumers and American producers and workers. With 70 countries making such offers in just a week, it looks like that’s where we’re headed.

But Trump has kept the tariffs on China. This will be a complicated maneuver (understatement) which, if Trump succeeds, will be the best thing that has happened to the world in decades. Let me explain.

China is the largest manufacturing exporter in the world. China’s economy is in shambles, and without manufacturing, it will be in a catastrophic situation.

Tariffs will increase the cost of production in China, reducing the profit margin for investors. So these investors will look to other countries to take their money, like Vietnam and India. This will strengthen our allies and partners and weaken China at once. What’s not to love?

If Trump manages to reorient global production away from China, it will be a blow to the Chinese economy that could undo decades of misguided policies. Better yet, instead of fighting China with our sons and daughters' blood, we can just bankrupt the country. Remember what Reagan did to the Soviet Union?

There are those on both the right and the left who like tariffs for their economic effect. And there are those who like them as a tool for free trade and national security. The latter I feel is a smart policy.

Especially if you are from America. Sure, Swaziland cannot reorient investment away from China and force 70 countries to adopt free trade. Tariffs will just make things more expensive for your citizens.

But if you are American, you are powerful enough to accomplish these goals. It is irresponsible not to try to change things up.

Note: the opinions expressed herein are those of Chuck Warren only and not his co-host Sam Stone or Breaking Battlegrounds’ staff.