Story: Economic thought

Page 3. Protection and free trade

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The theory of comparative advantage – that widespread trade was good for all economies – was widely accepted in Britain. It spread to continental Europe and the United States but was not as zealously embraced.

William Gladstone, chancellor of the exchequer (finance minister) in the early 1860s and British prime minister in 1868, adopted free trade. He campaigned against government corruption, making it hard for respectable politicians to be in favour of anything other than free trade, and restricted government spending.

Economic thinkers like Adam Smith and John Stuart Mill argued that the only areas where government intervention was indispensable were the classic ‘public goods’ of justice and defence, and initiatives where entrepreneurs could not make a profit on investments. Tariffs (taxes on imports) were seen as protecting businesses from fair competition, and imposing unnecessary costs on consumers. The sophistication of Gladstone and leading economists was simplified in everyday discussion, which talked of minimal government.

Revenue tariffs

There were problems adopting laissez-faire economics in New Zealand. In the 19th century government revenue depended heavily on tariffs, but free-trade economic thinking required abolition of tariffs. New Zealand politicians struggled to reconcile necessity with respectability. They wanted to maintain government revenue but also adopt free trade orthodoxy to show they were abreast of contemporary thinking.

Politicians developed some New Zealand economic ideas. ’Revenue tariffs’, which could be levied without affecting the size of imports, were distinguished from ‘protectionism’ which aimed at reducing imports. (Even the United Kingdom retained some revenue tariffs.) Revenue tariffs were on goods that were not produced domestically and could be termed ‘luxuries’. This drew on an older idea that luxuries should be taxed rather than necessities. The argument was dubious as demand for luxuries is usually sensitive to price increases, and tariffs raised prices, but New Zealand retained both trade respectability and government income.

Infant industries

Local thinking went further. As in the United States and continental Europe, a notion of development was put forward. Mill, England’s leading economist, endorsed the idea of ‘infant industries’. Tariffs on imported goods could help a local infant industry making similar goods grow to a level where it needed no tariff protection. This idea had economic validity in New Zealand – people argued that a period of transition would enable the economy to reach a position where resources were used efficiently and protection could end.

However New Zealand politicians could see infant industries everywhere. They developed sophisticated economic ideas to assist the development of colonial industries though tariffs. But in practice there was a lot of political horse-trading – imported goods used in farming and other influential local industries were excluded from the tariff schedule.

How to cite this page:

Gary Hawke, 'Economic thought - Protection and free trade', Te Ara - the Encyclopedia of New Zealand, (accessed 15 April 2024)

Story by Gary Hawke, published 11 Mar 2010