Siberian Grapes and Adam Smith: Why Tariffs Are Bad

Tariffs might be OK as a source of revenue, and it would be hard for them to suck as bad as the current American income tax system. They might be OK as a means to the end of achieving a foreign policy goal. So I'm not talking about Trump's tariff policies as such.

I'm just talking about tariffs as such. As such--in and of themselves, not considering all possible uses and consequences--they're bad. They're inherently detrimental to economic productivity. And did you know that that was exactly the point Adam Smith aimed at when he talked about the Invisible Hand?

Now the same insight applies generally to more or less all government meddling in the economy. But when he talked about the Invisible Hand, he was specifically talking about what's wrong with "Restraints upon Importation from Foreign Countries of Such Goods as Can Be Produced at Home." Here's The Wealth of Nations--do a Ctr-F for yourself.

Here's a version of his argument:

1. Everyone who makes economic decisions freely is someone who uses his economic resources in support of local industry.

2. Everyone who uses his economic resources in support of local industry is someone who is working so as to make the local economy as productive as possible.

3. So everyone who makes economic decisions freely is someone who is working so as to make the local economy as productive as possible.

Thus the famous line about how my economic self-interest is good for other people too:

By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain; and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.

All this is much clearer with his superb illustration:

By means of glasses, hot-beds, and hot-walls, 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. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and Burgundy in Scotland?

I like to make it clearer still: Suppose an ambitious Russian businessman wants to grow grapes to make wine in Siberia. And suppose a well-meaning Russian government decides to pass some laws to support the new wine industry by imposing massive tariffs on imports of wine into Siberia.

The result: Inefficiency. Wasted resources. Maybe a successful wine industry, sure. But at a cost. A cost we can't always see but know is there: some real bad caused and some real good prevented because customers couldn't buy wine without paying an unnecessarily high cost for it. That wasted money means less food, less savings, less investment, a car going too long without maintenance, medical bills paid off more slowly, or something else that's bad.

What makes an example like this easy to understand is just how bad a policy like this is. But what makes it bad is something that involves any tariff: When people can't make free economic decisions, their decisions are less efficient; when their decisions are less efficient, they're worse for a growing local economy.