Simplified Wealth of Nations by Adam Smith, Book 4, Chapter 2c: Retaliatory Restraints
Chapter 2c: Retaliatory Restraints
23 There are two cases when it will be advantageous to lay some burden on foreign industry to encourage domestic industry.
24 When an industry is needed for national defence.
When a tax is imposed by foreign countries on certain products of the home country.
Case 1: National Defence
For example, Great Britain's defence depends very much on its sailors and shipping.
The act of navigation very properly gives British sailors and shipping the monopoly of British trade by:
absolute prohibitions or
heavy burdens on foreign shipping
The following are the principal dispositions of this Act.
25 All ships, of which the owners and 3/4 of the mariners are not British, are prohibited from:
trading to the British settlements and plantations
being employed in the coasting trade of Great Britain
The penalty is the forfeiture of the ship and its cargo.
26 The most bulky commodities can only be imported into Great Britain in:
the above-mentioned ships
ships of the country:
where those goods are produced
whose owners, masters, and 3/4 of the mariners are of that country
When goods are imported in ships of those countries, they are subject to double aliens duty.
If imported in ships of any other country, the penalty is forfeiture of the ship and its goods.
When this act was made, the Dutch were, and still are, the great carriers of Europe.
By this regulation, the Dutch were entirely excluded from:
being the carriers to Great Britain
importing to us the goods of other European countries
27 The most bulky commodities are prohibited from being imported, even in British ships, from any country where they were not produced.
The penalty is the forfeiture of the ship and its cargo.
This regulation was probably also intended against the Dutch.
Holland was then, as now, the great emporium for all European goods.
By this regulation, British ships were hindered from loading other European goods in Holland.
28 Salt fish of all kinds, whale-fins, whale-bone, oil, and blubber, not caught by British vessels nor cured on them, are subjected to double aliens duty when imported into Great Britain.
The Dutch were the principal fishers in Europe.
They were the only ones who attempted to supply foreign nations with fish.
By this regulation, a very heavy burden was laid on their supply to Great Britain.
29 When the act of navigation was made, England and Holland were not at war.
However, the most violent animosity subsisted between them.
It began during the government of the Long Parliament, which first framed this act.
War soon broke out in the Dutch wars during the government of the Protector and of Charles II.
Some of the regulations of this act possibly proceeded from national animosity.
"They are as wise as if they had all been dictated by the most deliberate wisdom."
At that time, the most deliberate wisdom would have recommended the reduction of Holland's naval power.
National animosity then, aimed at this goal.
Holland was the only naval power which could endanger England's security.
30 The act of navigation is not favourable to foreign commerce or that opulence arising from it.
The nation's interest in its commercial relations to foreign nations is to buy as cheap and to sell as dear as possible.
It is the same as the merchant's interest.
But it will most likely buy cheap when there is perfect freedom of trade.
The freedom to trade encourages all nations to bring the goods the country needs.
It will most likely sell dear when its markets are filled with the most buyers.
The act of navigation lays no burden on foreign ships that come to export British products.
The ancient aliens duty used to be paid on all exported and imported goods.
It was removed from most of the articles of exportation through subsequent acts.
But if foreigners are hindered from coming to sell by bans or high duties, they cannot always afford to come to buy.
Because they must lose the freight from their own country to Great Britain if they arrive without a cargo.
By reducing the number of sellers, we reduce the number of buyers.
We are likely to buy foreign goods dearer and sell our own goods cheaper.
But since defence is more important than opulence, the act of navigation is, perhaps, the wisest of all commercial English regulations.
Case 2: When a tax is imposed by foreign countries on certain products of the home country.
In this case, it is reasonable that an equal tax should be imposed by the home country on the like produce of those foreign countries.
This would not:
give the monopoly of the home market to the domestic industry
turn more of the country's stock and labour towards a particular employment
only hinder such stock and labour from being turned away into a less natural direction by the tax.
leave the competition between foreign and domestic industry on nearly the same footing as before the tax
In Great Britain, it is usual to lay a much heavier duty on foreign imports of the same kind when any such tax is laid on the produce of domestic industry.
This is to stop the complaints of our merchants and manufacturers that they will be undersold at home.
32 According to some, this second limitation should be extended beyond those foreign commodities which compete with our own.
When the basic necessities which we export are taxed by foreign countries, it becomes proper to tax:
the like necessities imported from them
all foreign goods which compete our domestic produce
Subsistence becomes dearer because of such taxes.
The price of labour must always rise with subsistence.
Because of it, every domestic commodity becomes dearer indirectly.
Such taxes are really equivalent to a tax on domestic commodities.
To put domestic industry on the same footing with foreign industry, it is necessary to lay some duty on every foreign commodity equal to this price enhancement of the home commodities which competes with it.
33 Whether taxes on basic necessities, such as soap, salt, leather, candles, etc., raise the price of labour and all other commodities, I shall consider later in Book 5, Chapter 2.
Supposing that they have this effect, this price enhancement differs in two respects:
34 It can always be precisely known how the price of a domestic commodity could be raised by such a direct tax.
But it could never be known precisely how far the increase of the price of labour might affect the price of every commodity it produces.
It would be impossible to know exactly how the tax on every foreign commodity increases the price of every home commodity.
35Taxes on basic necessities have the same effect on the people as poor soil and bad climate.
Provisions are dearer in the same way as if it required extraordinary labour and cost to raise them.
It would be absurd to direct people how they should employ their industry if the scarcity was caused by soil and climate.
It would be as absurd with the artificial scarcity from such taxes.
It would be more advantageous for the people to:
accommodate their industry according to their situation
find out on their own the more advantageous employments despite their unfavourable circumstances
It is most absurd to make amends to the people by laying a new tax on them and make them pay dearer for other commodities when they:
are already overburdened with taxes
already pay too dear for basic necessities
36 When taxes on necessities rise to a certain height, they are a curse equal to the earth's barrenness and the inclemency of the heavens.
Yet they have been imposed in the richest and most industrious countries.
No other countries could support so great a disorder.
Only the strongest bodies can live and be healthy under an unwholesome regimen.
Only the nations that have the greatest natural and acquired advantages in every industry, can prosper under such taxes.
Holland has the most taxes in Europe.
Yet it continues to prosper despite of them and not because of them.
37 There are two other cases when it may be deliberated:
how far it is proper to continue the free importation of foreign goods
how or how far it is proper to restore that free importation after it has been interrupted for some time
Retaliatory Commerical Policies
38 It may be deliberated how proper it is to continue the free importation of certain foreign goods, when a foreign nation restrains their importation of some of our manufactures by high duties or prohibitions.
In this case, revenge naturally dictates retaliation.
It dictates that we should impose the like duties and prohibitions on our importation of their manufactures.
Nations seldom fail to retaliate in this way.
The French openly favoured their own manufactures by restraining the importation of foreign goods that compete with them.
This was most of Mr. Colbert's policy.
Despite his great abilities, he seems to have been imposed upon by the sophistry of merchants and manufacturers..
Most French intellectuals think that his policies were not beneficial to France.
He imposed very high duties on many foreign manufactures through the tariff of 1667.
He refused to moderate them in favour of the Dutch.
In 1671, the Dutch banned the importation of French wines, brandies, and manufactures.
The Franco-Dutch war of 1672 was partly caused by this commercial dispute.
The treaty of Nijmegen ended it in 1678 by moderating some of those duties in favour of the Dutch.
The Dutch then took off their prohibition.
Around the same time, the French and English began to mutually oppress each other's industry by similar duties and prohibitions.
However, the French set the first example.
The hostility between the two nations ever since has hindered them from being moderated on either side.
In 1697, the English banned the importation of bonelace from Belgium.
At that time, the government of Belgium was under Spain.
In return, it banned the importation of English woollens.
In 1700, the ban on bonelace imports into England was removed on condition that the English woollens importation into Belgium should be restored.
39 There may be good policy in retaliations of this kind, when there is a chance that they will repeal the high duties or prohibitions by other countries.
The recovery of a great foreign market will more than compensate the temporary inconvenience of paying dearer for those goods in a short time.
Perhaps judging whether such retaliations will produce a good effect does not belong to the science of a legislator.
The legislator's deliberations should be governed by unchanging principles.
It also does not belong to the skill of the insidious and crafty politician.
His councils are directed by the fluctuations of affairs.
When there is no chance of any such repeal, it seems a bad method of compensating the injury done to our people to do another injury ourselves.
When our neighbours ban our products, we generally ban more of their products.
Banning the same products would seldom affect our neighbours very much.
This may give encouragement to some of our workers.
By excluding some of their rivals, our workers might raise their price in the home-market.
Those workers who suffered by our neighbour's ban will not be benefited by our ban on foreign goods.
On the contrary, our workers and citizens must pay dearer for certain goods.
Every such law imposes a real tax on the whole country.
This tax favours the workers who were not injured by the foreign ban.