Adam Smith’s 1780 Letter Shows He Saw Tariffs as a Tool to Improve Industry
Adam Smith, long considered the patron saint of free trade, argued in a letter written after The wealth of nations that tariffs could help strengthen domestic production by pushing local industry to improve quality.
The January 3, 1780 letter to British politician William Eden complicates the usual image of Smith as a staunch opponent of import duties. In the letter, Smith defended “moderate and reasonable duties” while criticizing outright bans on imports.
“A ban,” Smith writes, “cannot serve any purpose other than that of monopoly.” On the other hand, a duty could still allow foreign products to enter the market while changing the incentives faced by domestic producers.
Although Smith’s letter to Eden has long been included in published collections of his articles, it has received almost no attention from scholars. The 250th anniversary of the publication of The wealth of nations sparked renewed interest in Smith’s work.
Smith’s example was salted herring in the Netherlands, which he considered superior to the British product. Rather than excluding Dutch herrings altogether, he proposed a duty that would leave them on the market at a higher price. British healers, he wrote, would then attempt to capture this higher price by improving their own products through “superior care and cleanliness.” He predicted that the resulting emulation would so accelerate improvement that British fisheries could eventually rival those of the Netherlands, even in foreign markets.
“The British healers will at once endeavor to obtain this high price, and by superior care and cleanliness raise their products to a standard equal to that of the Dutch, and this emulation will probably in five or six years raise the manufacture to a degree of improvement which I now despair of attaining in fifty or sixty years,” Smith wrote. “Our fisheries could then compete with those of the Dutch in foreign markets, where they cannot at present compete with them, and manufacturing could not only be greatly improved, but greatly expanded.”
The passage suggests that Smith did not view rising prices as a reason to reject the tariffs, even though the cost of the tariffs was not only passed on to consumers but also drove up the prices of domestically produced herring. Rather, Smith saw it as a feature, not a bug: a fee could create the price incentive local producers needed to improve quality, increase production, and become more competitive.
Smith also argued that tariffs could be a source of revenue for the UK Treasury.
This is a broader argument for tariffs than that usually associated with Smith. He didn’t just claim that tariffs were less harmful than bans. He argued that tariffs could incentivize domestic producers to improve quality, increase production and become more competitive.
Another striking element of the letter is the high standard that Smith considers “moderate and reasonable.” In the herring example, the duty he proposed was about half the price of a barrel of British salted herring.
The date of the letter makes it difficult to dismiss as an early inconsistency. It was written four years after the publication of The Wealth of Nations in 1776.
Smith’s published works are more mixed. In The wealth of nationshe repeatedly attacked bans and high tariffs as monopoly devices and criticized policies that protected the narrow interests of producers at the expense of consumers. But he also allowed retaliatory tariffs in some cases, and in a discussion of manufactured goods, he said policies guaranteeing a slightly better price to producers could “really incentivize these manufactured goods” and allow them to employ more labor.
This means that Eden’s letter is not entirely divorced from Smith’s broader economic considerations. Its default position remained hostile to monopolies, prohibitions and mercantilist privileges. But the latest letter shows that he did not consider all tariffs to be equivalent to the restrictions he had condemned.
Instead, Smith appears to have drawn a distinction between policies that completely insulated domestic industry from competition and those that preserved competition while giving producers room to grow.
This distinction will likely surprise many economists and commentators who cite Smith primarily as an authority against tariffs. The 1780 letter suggests a narrower and more complex position: Smith opposed import bans that created a monopoly, but he was willing to argue that tariffs could strengthen domestic industry when they changed price incentives without completely excluding competition.
