Key Takeaway:
State intervention in global economics is gaining momentum, particularly since the 2010s, due to financial crises, geopolitical tensions, and the fragility of global supply chains. The relationship between exports and protectionism is complex, as successful industrial and trade policies often blend export promotion with elements of protectionism. South Korea and Taiwan have used protectionism to foster economic growth, with emergency tariffs and special laws on imports. The United States and China have also used protectionism to foster economic growth. However, protectionism has its challenges and risks, as it can lead to failure. To address this imbalance, international trade agreements should allow lower-income countries more flexibility in designing their economic development policies, including the use of protectionist measures. By leveraging protectionism strategically, countries can catch up with high-income nations and achieve successful industrialization and economic development.
In the evolving landscape of global economics, state intervention is making a notable comeback. While governments have always played a role in shaping markets—whether by fostering specific industries or driving innovation—the past decade has seen a renewed emphasis on industrial and trade policy. This shift, particularly pronounced since the 2010s, reflects a world grappling with the aftermath of financial crises, rising geopolitical tensions, and the fragility of global supply chains.
Several factors have fueled this renaissance in state-led economic strategies. The global financial crisis of 2007–08 shook the foundations of economic stability, prompting nations to reassess their reliance on markets alone. Geopolitical rivalries have intensified, with countries seeking to secure their economic sovereignty in an increasingly volatile world. Moreover, recent disruptions in global supply chains have highlighted the need for stronger domestic manufacturing bases, pushing governments to take a more active role in guiding economic development.
As state intervention gains momentum, experts are weighing in on the best approaches for governments to stimulate growth. A common thread in their advice is the importance of incentivizing exports while avoiding the pitfalls of protectionism. Yet, the narrative surrounding protectionism is far from straightforward. History shows that successful industrial and trade policies often blend export promotion with elements of protectionism, creating a nuanced approach to economic growth.
The Complex Relationship Between Exports and Protectionism
Governments are right to focus on exports as a driver of economic growth, but the relationship between protectionism and prosperity is more complicated than it seems. In many instances, the most successful economic transformations have been fueled by a careful balance of outward-looking trade strategies and protective measures that shield nascent industries from global competition.
South Korea and Taiwan offer compelling examples. Between 1960 and 1990, these countries transformed from low-income economies into high-income powerhouses. Central to their success were policies meticulously crafted to promote exports. In a 1965 speech, South Korean President Park Chung-hee famously declared exports the “economic lifeline” of the nation. But protectionism also played a crucial role in their rapid development.
In South Korea, emergency tariffs were frequently imposed on goods with soaring import growth, curbing competition from foreign products. Beyond these visible measures, the country employed a range of subtler protectionist tactics. Special laws on most imports meant that permission from public agencies was often required, effectively controlling what could enter the market. Additional taxes, sometimes disguised as education or defense levies, were applied to non-essential imports like luxury goods.
Taiwan’s approach was even more explicit. By the mid-1970s, nearly half of the items on its tariff schedule faced import taxes exceeding 40%. Like South Korea, Taiwan used non-tariff barriers to protect its domestic industries. Import licenses were tied to export performance, and restrictions were placed on the origins of imports and who could bring them in. Firms looking to import certain products had to undergo a reference check to ensure that domestic suppliers couldn’t meet their needs on price, quality, or delivery.
Historical Precedents: Protectionism as a Development Tool
South Korea and Taiwan were not breaking new ground in their use of protectionism to foster economic growth. The United States, often seen as a bastion of free markets, was one of the most protectionist countries in the 19th century. During this period, when the U.S. emerged as a global economic powerhouse, it maintained some of the highest tariff rates on imported goods.
China’s approach in the 1990s and 2000s offers another example of strategic protectionism. While China’s state-led industrialization strategy differed from those of South Korea and Taiwan, it still relied on protective measures. China attracted foreign investment into manufacturing by encouraging joint ventures between multinational corporations and state-owned enterprises. This strategy facilitated technology transfer and gradually reduced China’s reliance on imported goods, leading to its dominance in global manufacturing today.
The Challenges and Risks of Protectionism
While protectionism has been integral to the success of many industrial and trade policies, it is not without risks. For every success story, there are cautionary tales. In the 1950s and 1960s, many African and Latin American governments implemented protectionist policies to nurture domestic industries. Unfortunately, these efforts often failed to produce competitive industries capable of thriving in global markets.
Similarly, export subsidies and other forms of state intervention are not guaranteed to succeed. The reality is that all forms of state intervention—whether through protectionism or other means—carry the risk of failure. However, the absence of state intervention almost certainly guarantees failure, particularly for countries seeking to break into competitive global markets.
One way to view industrial and trade policy is through the lens of venture capital. Just as investors expect some of their bets to fail while others succeed spectacularly, governments should approach economic policy as a portfolio of strategies. The successes will offset the inevitable failures.
The Global Landscape: Can Everyone Play the Protectionist Game?
The question remains: can all countries afford to be protectionist at the same time? The answer is likely no, which is why trade wars are a constant concern. The ongoing economic tensions between China and the U.S. illustrate the dangers of escalating protectionist measures in a globalized economy.
In a world where nations can retaliate against each other with tariffs and other trade barriers, ensuring a level playing field becomes critical. Currently, the global economic system favors the wealthiest and most powerful countries, along with the multinational corporations based within them. To address this imbalance, international trade agreements should allow lower-income countries more flexibility in designing their economic development policies, including the use of protectionist measures.
Simply put, countries that are lagging technologically should have access to a broader set of policy tools. This would give them a better chance to catch up with high-income nations. If there’s one lesson to be learned from economic history, it’s that protectionism, when used strategically, has been a vital component of successful industrialization and economic development.
