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Book 4, Chapter 3
Themes
Key
LitCharts assigns a color and icon to each theme in The Wealth of Nations, which you can use to track the themes throughout the work.
Labor, Markets, and Growth
Capital Accumulation and Investment
Institutions and Good Governance
Mercantilism and Free Trade
Money and Banking
Summary
Analysis
Manufacturers and traders often petition the government to support exports. Drawbacks, or tax refunds, are desirable for domestic goods because they keep the natural division of labor in place. So are drawbacks on import taxes for goods to be re-exported. These drawbacks have enabled Britain’s trade to flourish, particularly with its colonies. But some goods cannot be brought to Britain except for re-export, and there is no drawback for them. The drawback for re-exporting French goods is lower, but it’s generally higher for wine (except French wine). For trade with the American colonies, the drawbacks are even higher for wine, but there are none for most other commodities.
Drawbacks are the third mercantilist policy that Smith aims to refute, the first that is oriented toward exports, and the only one that he largely sees as reasonable. After all, drawbacks are just a way to suspend taxes that shouldn't exist in the first place. (Smith will explain in Book V how he thinks a government should structure its tax system.) Import taxes hamper the carrying trade by making it inefficient to route goods through intermediate ports like London, while taxes on domestic goods hurt domestic producers (and sometimes give foreign competitors an unfair edge).
Themes
While these drawback policies weren’t unreasonable, it makes little sense to encourage the carrying trade for its own sake. Customs houses benefit from the drawbacks, without which there would be no imports for re-exportation in the first place. But when there is already a trade monopoly—like Britain’s exclusive rights to trade with its American colonies—drawbacks do not increase trade, and only cost the customs house in lost revenue. Drawbacks also encourage fraud, as merchants will pretend to re-export goods to secure a drawback, then secretly sell them domestically.
While Smith doesn’t oppose drawbacks in principle, he does think they’re an unnecessary and roundabout solution in most cases: simply reducing taxes would have the same effect (with much lower administrative costs). Once again, he points out how Britain has established a particular regulatory system not because it actually helps the public, but because government administrators and the merchants in Parliament stand to profit from it. This idea will recur throughout the rest of Book IV—particularly in the chapter on colonialism. Indeed, Smith’s critique of merchants and manufacturers would not be out of place in debates about the corporate capture of government today. No matter how different the 18th-century economy was from the one we have today, Smith’s analysis suggests that it's always risky to give employers more political power than workers and landlords.
Themes
