The Wealth of Nations · Chapter
Of Drawbacks explained
Smith examines the system of drawbacks, where duties paid on imported goods are partially or fully refunded upon re-exportation.
What happens
Smith examines the system of drawbacks, where duties paid on imported goods are partially or fully refunded upon re-exportation. He argues that drawbacks are a reasonable form of encouragement because they do not distort the natural allocation of capital or the division of labor, but merely prevent duties from driving capital away from certain employments. He details the historical evolution of drawback rules in Great Britain, including variations for different goods (e.g., tobacco, sugar, wine) and for different destinations (e.g., the American colonies). Smith notes that drawbacks are justified only for trade with truly foreign and independent nations, not for colonies where the mother country enjoys a monopoly, as in the latter case drawbacks may simply be a loss to revenue without expanding trade.
Themes in this chapter
Free Trade and Market Competition
Smith argues that drawbacks preserve the natural balance of industry and the division of labor, rather than distorting it, by preventing duties from driving capital away from its natural employment.
Role of Government
The chapter examines how government policies on duties and drawbacks can either support or hinder trade, and Smith critiques the motives behind certain regulations, such as the desire to discourage French goods.
Wealth and Money
The discussion of drawbacks touches on the revenue of customs and excise, and how these policies affect the flow of gold and silver through the carrying trade.
Characters to notice
- Great Britain
The nation whose customs and drawback policies are analyzed.
- The Colonies
The North American and West Indian colonies, which had special drawback rules and a monopoly on certain goods.
- The French
French goods were subject to higher retained duties and less favorable drawback treatment due to national prejudice.
- Merchants and Manufacturers
The interest group that seeks extensive foreign sales and petitions for export encouragements like drawbacks.
Key passages
“To allow the merchant to draw back upon exportation, either the whole or a part of whatever excise or inland duty is imposed upon domestic industry, can never occasion the exportation of a greater quantity of goods than what would have been exported had no duty been imposed.”
Refunding part or all of domestic duties on exported goods does not increase exports beyond the level that would occur without any duty.
Smith argues that drawbacks are neutral; they merely prevent duties from reducing trade, not artificially boost it.
“Such encouragements do not tend to turn towards any particular employment a greater share of the capital of the country, than what would go to that employment of its own accord, but only to hinder the duty from driving away any part of that share to other employments.”
These incentives do not redirect capital into specific industries; they only stop duties from pushing capital elsewhere.
Smith emphasizes that drawbacks preserve the natural allocation of capital.
“The carrying trade, though it deserves no preference, ought not to be precluded, but to be left free like all other trades.”
The carrying trade should not be given special favors, but it should also not be restricted; it should be as free as any other trade.
Smith advocates for neutrality in trade policy, opposing both special privileges and prohibitions.
“A drawback, for example, upon the exportation of European goods to our American colonies, will not always occasion a greater exportation than what would have taken place without it.”
A refund on exports to the colonies may not actually increase exports, because the monopoly already ensures a certain level of trade.
Smith points out that drawbacks to colonies with monopolistic trade are often ineffective and merely cost the treasury.
