A mere recital of the economic policies of governments all over the world is calculated to cause any serious student of economics to throw up his hands in despair. What possible point can there be, he is likely to ask, in discussing refinements and advances in economic theory, when popular thought and the actual policies of governments, certainly in everything connected with international relations, have not yet caught up with Adam Smith? For present-day tariff and trade policies are not only as bad as those in the seventeenth and eighteenth centuries, but incomparably worse. The real reasons for those tariffs and other trade barriers are the same, and the pretended reasons are also the same.
Hazlitt cites Adam Smith’s observation that the best interests of society are advanced by people being able to buy what they want from whoever sells it cheapest. International free trade is just one more example of the benefits of the specialisation of labour: we cannot prudently make for ourselves what it would cost us less to buy than to produce.
Removing tariffs may reveal the uneconomic nature of protected enterprises and drive them out of business. However, the consumer will be able to by the particular product which is no longer subject to tariffs for less, increasing their disposable income. Foreign currency held in the exporting country will be used sooner or later to buy goods from the country it is exporting to, supporting productive businesses there. Consumers win and labour is more gainfully employed in both countries.
Imposing tariffs on foreign goods in order to stimulate creation of a domestic market also creates problems. The domestic consumer will be forced to spend more of their income on subsidising the domestic industry, thus diverting their income away from other, more productive, industries. Jobs are destroyed in one place in order to subsidise them in another place. Because the loss of these jobs elsewhere is dispersed, it is easy to fall under the illusion that the industry is being supported at no cost.
Tariffs harm wages and unprotected industries. They divert labour into areas of the economy which are less efficient, lowering productivity. Real wages in unprotected industries are reduced relative to what they would be without tariffs. Those businesses with a large potential export market suffer a reduction in the amount of domestic currency in the hands of foreign customers which would otherwise be used to buy their goods.
Tariffs protect special interests at the expense of the general interest. They should never be introduced.