Doomed to Fail: What a protectionist US can learn from South American history

100 Argentine Pesos, worth ca. $0.04 USD in 1981

By: Alastair Munro

A nation, still reeling from the aftershocks of a generation’s greatest economic downturn, is faced with uncertainty. It remains one of the largest economies in the world but to a minority of economists and politicians, aspects of its international trade are worrisome. It does not have many exports, barring a strong agricultural sector, and most higher-grade consumer goods are imported from other countries capable of producing them at a lower price. Though the strong economy means they have no shortage of these cheap foreign goods, some in government believe they are being taken advantage of. They import more than they export, and they think it is a bad deal. Influenced by these ideas, the President starts putting up tariffs on imports, hoping to create a more favourable market for domestic manufacturing. The belief is if the alternatives are made more expensive, the local sector will have a captive market, eventually translating into greater prosperity for the whole country as the factories and manufacturers grow without foreign competition. This was the plan. This sounds familiar. With few cosmetic changes, it is a summary of what has been taking place under the Trump administration in the United States. However, in actuality, this was the economic policy of Argentina from the 1950s to the 1980s, ultimately leading to one of the greatest modern national economic disasters. It seems wise to ask, therefore, how similar are these stories, and will the results be the same?

Before we can consider the parallels between these two stories, we should try to understand what exactly Argentina’s plan was and what fruit it ultimately bore. Championed by the economist Raul Prebisch, the policy was a practical application of Dependency Theory, which stated that countries on the periphery of global economies would never be able to attain significant economic growth under free trade. It was thought that these less developed countries, primarily exporters of primary goods (resources and commodities), would be forced to buy manufactured goods from developed nations with strong manufacturing bases. These nations, according to the theory, inflated the prices of their products to the point that developing countries would never profit. The solution to this, for Argentina, was to implement state intervention in order to grow their own manufacturing sectors until they would have a chance on the international stage. Generally, this was done by imposing stiff tariffs on foreign goods in the country, while simultaneously subsidising the domestic ‘infant industries’, thus making them the primary provider of goods to the domestic market. In theory, it was a good plan - the fledgling producers would have a chance to learn efficiency through practice in the comfortable domestic environment, and would be able to achieve economies of scale much more quickly with a large market and generous government subsidies.

However, the day that domestic industries could compete internationally never came. Looking back, it is not difficult to see the problems: the economies of scale never came due to the relatively small size of the domestic markets. The strong subsidy programs both hemorrhaged the government’s coffers and provided a feather pillow to manufacturers that dis-incentivised efficiency and innovation and the lack of competition meant that the manufacturers never needed to provide affordability or superior products. This all would have been manageable, were it not for the fact that this strategy could never be maintained for long. The tariffs on foreign goods and inefficient local producers meant that consumers had to pay far higher prices than they would have otherwise, decreasing the purchasing power of the population. Worse still, the cost of maintaining the subsidies, in addition to repayments on the original industrialisation loans, led to a catastrophic debt crisis. The result was a disaster unrivalled in the region’s history- wages fell drastically, huge portions of the population were plunged into poverty, and inflation ravaged what was left of the economy.

Obviously, this was a dramatic reaction to zealous economic dogma; to say that the United States is verging on economic collapse would be ridiculous. However, the parallels are there. For starters, they stem from comparable motivations. President Trump has made no secret of his belief that free trade has been to the detriment of the U.S.’ economic health, due to a negative balance of trade. Like Argentina, the American industrial base is small, accounting for under a fifth of the GDP, while the lion’s share is devoted to the service sector. This foreign satisfaction of consumer goods is seen by Trump as an economic weakness. While not nearly as drastic, his response so far has been similar, if less nuanced, to the Prebischian model: attempting to dismantle free trade and erect tariffs on foreign competitors, from China to Canada, in order to create a sheltered environment for sunset industries to thrive in. Just as it did in South America, this seems reasonable but it falls victim to the same perils. An environment in which the government prevents competition will not create industries that are hardy enough for the international market anytime soon. In a country that has no trouble competing internationally in the service sector, attempting to save a mostly obsolete manufacturing base through means which have proven to be unsuccessful is not just misguided, it’s tangibly detrimental to the population. Just as in Argentina, tariffs on foreign goods are only necessary because they are cheaper than those made domestically. The protectionist measures implemented by Trump will pass the higher cost of these products onto the consumer, decreasing the purchasing power of citizens in the pursuit of an unsustainable economic plan.

Although Trump’s policy of protectionism and import substitution is unlikely to cause the downfall of the American economy, it is just as unlikely to improve it. Rather, what we can count on it to do is make things more difficult for the average consumer. History has shown that this strategy does not work as intended, but it seems that the current American government has not considered the examples of the recent past. It might just find that those who cannot learn from history are doomed to repeat it.