A Return to Pre-Revolutionary Thinking?

1776 was a year of new thinking in Scotland and America. Great figures put quill to parchment, declaring that freedom was the route to prosperity - the American revolutionaries wrote the Declaration of Independence and Adam Smith published the Wealth of Nations. Smith wrote of international, arguing that tariffs were misdirected and impoverishing - “By means of glasses, hotbeds, and hotwalls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be brought from foreign countries.” To the Americans, despite the Tariff Act of 1789 imposing a 10% general tariff on almost all imports, free trade internally was one of the most important initiatives of the fledgling nation. This is why centralisation of currencies and abolishing trade barriers (embodied in the Commerce Clause) was a first priority for the Founding Fathers.

In fact, Thomas Jefferson wrote that “In political economy I think Smith's Wealth of Nations the best book extant.” We know that free trade is the grease between the gears of prosperity - the data is clear, from island states like Hong Kong, Taiwan, and Singapore, through to larger continent sized trade blocs such as the EU’s internal market, the freedom of merchants and innovators to exchange goods and services drives up living standards.

Since the late 18th century, and the birth of both a new nation and way of thinking about economics, a great deal of time has passed and new circumstances have arisen. Tariffs have moved from their traditional purpose of protecting nascent industries against foreign competition and combatting dumping, as with Chinese overconsumption. Now, with the US representing over 25% of global GDP, they are used as political weapons to adjust third-parties’ non-economic actions. To borrow from Clauswitz, (trade) war is politics by other means.

Unfortunately, the new Trump administration looks to impose tariffs on its closest trading partners - Mexico (now postponed), Canada (postponed too), China and the European Union. This has initially been used to acquire political concessions, namely on immigration and the drugs trade with Mexico and Canada. However, tariffs will continue for the Chinese market, as Trump wishes to continue his hawkish stance on communism and state-aid economics. Meanwhile, it is likely that Trump will use the tariff mechanism to undermine the pernicious regulatory influence of the European Union, which recently passed the EU AI Act limiting the influence of US tech companies. Basic trade economics are still cited for these impositions, but there is a much larger strategy at play.

Despite the cries of economists on both sides of the Atlantic about these measures, defenders of the tariffs say “well, these are not taxes - we’re making other countries pay.” However, this flies in the face of reality - not only is it well acknowledged that tariffs are a form of tax, but entire government departments are set up to collect them. So, who pays for tariffs? As ASI’s President, Madsen Pirie has highlighted: You do, the consumer. Businesses pass on the cost of this tax like any other, such as corporation tax, NICs, or VAT. If the business did not pass on the costs to consumers, they would have to make cost cuts internally, often damaging their productivity and profitability - however, consumers may be turned away by the higher prices, leading to the same outcome. This is bad news for US consumers, with the Tax Foundation estimating that tariffs will cost US consumers more than $1.1 trillion between 2025 and 2034.

Commentators should remember that despite its prominent freedom loving credentials, the US has never been a traditionally free trading nation. Even President Herbert Hoover, a textbook small state Republican, introduced the Smoot-Hawley Tariff Act which exacerbated the Great Depression. It was not until Reagan and Clinton that free trade was embraced - 205 years into the American story. Let’s hope that the new President reads some Adam Smith - we’d even be very happy to send him a condensed copy of the Wealth of Nations…