Adam Smith, long treated as 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 native industry to improve quality.
The January 3, 1780 letter to British politician William Eden complicates the standard picture of Smith as an unqualified opponent of import duties. In the letter, Smith defended “moderate and reasonable duties” while criticizing outright prohibitions on imports.
“A prohibition,” Smith wrote, “can answer no purpose but that of monopoly.” A duty, by contrast, could still allow foreign goods into the market while changing the incentives facing domestic producers.
Although Smith’s letter to Eden has long been included in published collections of his papers, it has received almost no notice by scholars. The 250th anniversary of the publication of The Wealth of Nations has prompted renewed interest in Smith’s work.
Smith’s example was Dutch cured herrings, which he regarded as superior to the British product. Rather than excluding Dutch herrings altogether, he proposed a duty that would leave them in the market at a higher price. British curers, he wrote, would then try to capture that higher price by improving their own goods through “superior care and cleanliness.” He predicted that the resulting emulation would speed improvement so much that British fisheries could eventually rival the Dutch even in foreign markets.
“The British curers will immediately endeavour to get this high price, and by superior care and cleanliness to raise their goods to an equality with the Dutch, and this emulation will, probably, in five or six years time raise the manufacture to a degree of improvement, which at present I despair of its attaining to in fifty or Sixty years,” Smith wrote. “Our fisheries may then rival the Dutch in forreign Markets, where at present they cannot come into competition with them, and the manufacture may not only be much improved, but greatly extended.”
The passage suggests Smith did not view higher prices as a reason to reject tariffs, even if the cost of tariffs were not only passed through to consumers but also pushed up prices of domestically produced herring. To the contrary, Smith saw this as a feature not a bug: a duty could create the price incentive needed for native producers to improve quality, expand output, and become more competitive.
Smith also argued that duties could be a source of revenue for the British treasury.
That is a more expansive case for tariffs than the one usually associated with Smith. He was not arguing only that tariffs were less harmful than bans. He was arguing that duties could spur domestic producers to improve quality, expand output, and become more competitive.
Another striking feature of the letter is how high a rate Smith regarded as “moderate and reasonable.” In the herring example, the duty he proposed was roughly half the price of a barrel of British cured herring.
The letter’s date 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 work is more mixed. In The Wealth of Nations, he repeatedly attacked prohibitions and high duties as devices of monopoly and criticized policies that protected narrow producer interests at the expense of consumers. But he also allowed retaliatory duties in some cases, and in one discussion of manufactures he said that policies securing a somewhat better price for producers could “really encourage those manufactures” and allow them to employ more labor.
That means the Eden letter does not stand wholly apart from Smith’s broader economics. His default position remained hostile to monopoly, prohibitions, and mercantilist privilege. But the later letter shows he did not view every tariff as equivalent to the restrictions he 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 improve.
That distinction is likely to surprise many economists and commentators who cite Smith primarily as an authority against tariffs. The 1780 letter suggests a narrower and more complicated position: Smith opposed import prohibitions that created monopoly, but he was willing to argue that tariffs could strengthen domestic industry when they altered price incentives without shutting out competition altogether.
