The current inward-focused politico-economic rhetoric that is gaining ground in the United States today is reminiscent of Import Substitution Industrialization that unsuccessfully guided Latin American economic policy in the 1950's-70's.  I hear slogans from republicans and democrats alike touting the idea of "bring industry back to America,"  "put America back to work," "restore independence" from those nasty currency manipulators and copy-cats to the East, and so forth.  No doubt this evokes patriotism, a powerful force in the US, and sounds logical on the surface.  However, the economics and logistics involved are a bit more complicated, and if history is any indicator, it will not work well for the US, as it didn't for their neighbors to the south.  

A brief recap of how it went for Latin America:   

The region was made up of largely extractive economies that exported raw materials and unsophisticated goods but had to import final goods (sophisticated), from abroad.  Unsophisticated goods were income inelastic and did not benefit from a growing world economy, so terms of trade declined when more sophisticated goods became more expensive.  The terms of trade required them to export more to import the same.  So hey, we're importing all of this stuff that's getting more expensive.  We should just make it for ourselves here! Right?   

So they put up higher tariffs and other barriers to quell imports and gave big incentives to domestic producers including subsidies, tax breaks, and cheap loans.  Unfortunately the industrial infrastructure (factories, etc.) did not exist.  But not to worry, money was cheap.  Foreign goods (including machinery and supplies) were comparatively cheap but could not compete because of selective trade barriers.  Foreign countries naturally returned the favor with higher Import tariffs, meaning that Latin American exports were no longer competitive, but that was okay because new industry was to support and be maintained by domestic markets as they grew up together.  When exports dried up, reliance on domestic demand led to unsustainability because the size of industry could only grow as much as domestic demand, severely limiting economies of scale because consumption was not growing as hoped.  With the lack of competition, domestic industry grew up in a bubble and remained inefficient and could not compete in the global market.  This lack of exports combined with sustained imports led governments to borrow externally to maintain exchange rates, accumulating huge debts that would eventually bury them.    

Like Latin America in the 1950's exports are extremely vital to the US economy today.  While they do import much more than they export, they cannot afford for those exports to slip.  So to combat this balance of trade, it is very easy to say "hey, lets export the same stuff, but make the imported stuff ourselves, jobs AND stuff!"  So how would the US begin manufacturing and consuming goods that are currently being imported?  Make a more competitive product or eliminate the competition, of course.  And that's where the conversation stops.  The US used to be a manufacturing-based economy, sure.  You can see the skeletons of long forgotten industry in cities all over the country.  But those days are long gone.  You would essentially have to start from scratch to bring much of this production back state-side.  It is likely that enormous subsidies and/or import controls would be needed for these domestically-produced goods to compete because of the cost of labor and doing business in the US.  And all this for low-margin "unsophisticated" goods like textiles, housewares, etc.  History shows us that coddling domestic industry will only lead to inefficiency, lack of innovation, and make it less competitive in the long run.The shift from manufacturing to services and high-margin, high-learning curve industries in economic development is as natural as the shift from manual labor to management in a person's career.  

The protectionist measures that would be required for US goods to compete in these domestic markets would quickly set off the alarms of their trading partners and put US industries that actually are competitive, such as software, at a disadvantage.  Sound familiar?  Do you think anyone wanted Colombian coffee when import tariffs were at 112%*(p.63)? No.  There goes their export revenue and a lot of jobs of people who were supposed to be buying these new domestically produced goods.  A mildly reassuring sign in the US is Mr. Obama's talk about export promotion, though I've yet to see much more than cheerleading and whining about the Chinese.  To be clear, I'm not saying repatriating production is a bad thing, but it needs to be done organically, amid the natural forces of the market, not forced and engineered by policy.  

Export promotion is a great way to help pull the US economy out of recession and stimulate the job market, but US companies need to choose to expand through exporting because they and their products can compete internationally.  The only way a company can get to that point is if they are agile, lean, innovative, and well enough informed to see the opportunity.  Fostering these qualities are what should be focused on by the planners, not changing the rules of the game to temporarily alleviate the symptoms.  Some obvious suggestions include: education, simplifying red tape, maintaining or improving export assistance services, and, I can't believe I have to say it, but not cutting the im/ex bank** which hundreds if not thousands of exporters rely on for working capital loans to fill export orders.  Oh and even more ridiculous, the ex/im bank is a government entity that actually MAKES A PROFIT.   

If we were talking about oil (another can of worms), fresh water, or medicine...yes, I would worry.  But I could not care less that the t-shirts in my drawer are from Bangladesh and the bowls in my kitchen are from Mexico.   I could get up in the morning and go outside to pick carrots, spin yarn, and cut firewood, but my time is better spent elsewhere.  


*Franko, Patrice 2007 The Puzzle of Latin American Economic Development p.63 


Powered by
Copyright 2011, 2012 Patriotism to Protectionism: US Import Substitution - Cobia Global Commerce. All Rights Reserved.
Joomla theme by artisteer review