ECONOMYNEXT – US President Donald Trump in raising import duties and undermining the freedoms of Americans to trade freely is making a mistake which economists showed was wrong 300 years ago, a top Sri Lanka economist said.
“Though Donald Trump has used this as a weapon, it is something feconomists have warned policy makers against for 300 to 400 years,” W A Wijewardene told Lanka Business Tv, a social-media based economic news channel.
” Adam Smith, who is considered the father of economics, in 1776, in his book the Wealth of Nations, clearly pointed out that import duties are not successful, and Kings should avoid using tariffs.
“This is what we can tell America also. The US will not be able to create as many jobs as they think. Due to existing inflation and even higher prices after the tax there will be social unrest in the US.”
Before the emergence of economics, then called ‘Political Economy’, powerful politically connected business interests, which are now called ‘mafia’ in Sri Lanka, controlled the British economy propagating an ideology called Mercantilism.
Today Sri Lanka has the so-called ’tile mafia’, the ‘maize mafia’, the ‘rice mafia’, who gouge customers at prices of up to 100 percent or higher than the rest of South Asia and free trading East Asia, under cover of import duties.
Trump has been alternately labelled as a Mercantilist or an outright fascist-nationalist by his critics.
READ MORE: What is Mercantilism
Smith’s Wealth of Nations was a treatise against Mercantilism, the true benefits the UK saw in 1840 with the success of free trade with the end of ‘corn laws’ in particular following actions of other economists including David Ricardo.
Especially from around 1800, the economists supported sound money where the Bank of England was tightly controlled by the parliament to stop printing money to stop depreciation and balance of payments deficits, and make free trade possible.
The UK parliament after the report of the Bullionist Committee, stopped depreciation of the currency by forcing the Bank of England to return to the stable monetary anchor ending the fluctuating commodity prices of the floating exchange rate.
Later the Bank of England was further restricted by the Bank Charter Act, which however also ended free banking.
Smith himself also supported sound money, with some discretion subject to the gold standard though through what came to be called the real bills doctrine, unlike present day central banks with the policy rate that destroy exchange rates.
The US however also takes the credit of creating what came to be called ‘infant industries’. The ideology stems from the actions of Alexander Hamilton, a founding father who wanted to promote more industries in the US.
Hamilton in his ‘Report of the Manufactures’ to the Congress supported raising import tariff from 5 percent to 10 percent and cutting duties on inputs to zero from 5 percent and giving the tax proceeds to new industries as a subsidy (pecuniary bounty) for a few years.
Compared to present day tariffs in most countries and Trump’s tariffs, Hamilton’s taxes look like free trade.
The import duties for ‘infant industries’ were then used in nationalist Germany after being promoted by Alexander List, where fortunately the industries had emerged before the taxes.
Similar ideologies were also promoted after World War II, due to monetary instability coming from newly set up central banks, especially in Latin America.
Post World War II Germany (German economic miracle and East Asia was a region that defied the ideology and set up free trade zones to escape import duties, supported by fixed exchange rates or currency boards to ensure monetary stability.
After Japan became an industrialized nation following the Meiji restoration, Taiwan went down the same path fixing the exchange rate at 40 to the US dollar in 1960 with advice from Sho-Chieh Tsiang, a student of Austrian economist Friedrich Hayek, at the London School of Economics.
The New Taiwan Dollar, (originally created to replace the old Taiwan dollar at 40,000 to 1), is now around 33 to the US dollar.
Taiwan shortly after, set up the first free trade zone in Kaohsiung to escape import duties and gave duty rebates (like VAT) to companies outside the zones.
Singapore followed almost at the same time with Goh Keng Swee, also educated at London School of Economics, opposing the Keynesian policy rate of central banking and setting up a currency board arrangement.
The Singapore dollar which was 3 in the Bretton Woods period is now around 1.2 after it was appreciated by Goh to escape US inflation after the collapsed of the Bretton Woods. Taiwan also followed similar policies to escape Great Inflation and broke the peg.
When Singapore separated from Malaysia Goh abolished all import duties, defying the conventional advice to developing countries at the time from the UN in particular.
Hong Kong, where industrialization outside of Japan first took place in Asia, always had free trade and no central bank and was among the first source of FDI to industries in Singapore.
Sri Lanka also saw a flood of Hong Kong firms when free trade zones were set up after 1978 to escape import protection by J R Jayewardene along with tax holidays.
Free trading countries like Vietnam saw companies outside becoming export competitive, especially in agriculture and food production with uncontrolled imports of maize and rice for animal feed and children grew taller compared to the period of the controlled economy.
Sri Lanka has not removed chilling food taxes on maize, rice and other grains, despite children facing malnutrition after the rupee fell from 184 to 360 to the US dollar.
Though in the time of Adam Smith, Sri Lanka style domestic production ‘mafias’ were promoting protectionism, the US is now tied to global supply chains.
US Chamber of Commerce Senior Vice President John Murphy said two months ago that tariffs “will only raise prices for American families and upend supply chains. (Colombo/Apr05/2025)
