Protectionism as a development strategy

One of the realities of the global trading system is that average import tariffs are higher when imposed by developing countries than those implemented by advanced, high-income nations. To what extent are protectionist policies such as tariffs, import quotas, domestic subsidies and other trade barriers effective in supporting growth and development for lower and middle-income countries?

Trade-weighted average import tariff rate (2018) Source: World Economic Forum, Competitiveness Report, 2018

• Iran 29%
• Nepal 17%
• India 15%
• Ethiopia 14%
• Brazil 12%
• China 12%
• Kenya 11%
• South Korea 9%
• Vietnam 8%
• Mexico 5%

Main arguments/justifications for protectionism

1. Import substitution - erecting trade barriers is a policy designed to protect fledgling domestic industries that have not yet achieved sufficient economies of scale to become cost and price competitive in international markets. The infant industry argument is often used as justification for tariffs that increase the prices of substitute products in strategically important industries
2. Need to raise tax revenues - import duty revenues can be a useful source of tax revenues for developing countries especially when per capita incomes and formal employment is low which then limits the tax take from the domestic economy.
3. Tariffs can be justified as a response to alleged dumping of products into a country i.e. selling at a price below cost. Dumping can have a serious impact on the profits, investment and employment in those industries affected
4. Tariffs might also be a retaliatory response to allegations that a country has used a competitive devaluation of their currency to make their exports more price competitive

Evaluation

However there are also downsides / risks for developing countries if they maintain high average tariffs on imported goods and services:

1. Tariffs may protect jobs in some industries e.g. car making but have damaging effects elsewhere because they increase the prices of key imported raw materials, components and capital technologies
2. Revenues raised by tariffs might only be a small percentage of total government revenue and lost jobs in other sectors will diminish the net effect on these revenues
3. There is always the risk of retaliatory action by other countries - a good recent example has been the tit-for-tat trade war developing between the United States and China
4. Protectionist tariffs risk causing a loss of competition for domestic firms which eventually leads to lower productivity, less innovation and weaker competitiveness
5. Tariffs increase prices for consumers leading to higher inflation, reduced real incomes and an increased risk of poverty for poorer households
6. Protectionist subsidies for domestic firms can cost a government a lot of money leading to an increased budget deficit and rising national debt