Yves here. This post unpacks another layer of why Trump\u2019s tariffs are vastly more likely to accelerate America\u2019s decline than spark a revival. While tariffs can be a useful element in industrial policy, via sheltering key industries that often get other forms of government support, across the board tariffs are far too blunt an instrument to prove to be salutary. Among other reasons, they increase costs of many inputs, which hurts competitiveness of many export categories.<\/p>\n
One might ask, then, why has Russia fared well under broad baaed sanctions, which arguably have even more stringent effects than tariffs? First is that Russia is more of an autarky than any other country, is self-sufficient in virtually all critical resources, and has a large manufacturing base. Second, the \u201cshock and awe\u201d sanctions cut Russia off only from those nations that participated (and even then not fully so, witness the US still importing Russian uranium and the EU still importing Russian energy), Russia was still trading with many other key partners, particularly China, India, and Turkiye. Third, my impression is that aside from some critical areas like car and airplane parts, it was consumer goods that took the big hit. The Russian case suggests those are not as difficult to replace as industrial goods.<\/p>\n
By Richard Baldwin, Professor of International Economics IMD Business School, Lausanne; VoxEU Founder & Editor-in-Chief VoxEU. Originally published at VoxEU<\/a> <\/strong><\/em><\/p>\n The new Trumpian tariffs are not the familiar protectionism G7 nations have applied for decades. Instead of shielding particular sectors, they wall off the entire American goods-producing economy from foreign competition. This is precisely the logic of 20th-century import substitution industrialization \u2013 a strategy widely tried, and widely abandoned, because it raised costs, bred inefficiency, and undercut export performance. The rise of global value chains turned such tariff walls from protection into destruction. No one has tried import substitution industrialization since \u2013 apart from America in 2025. <\/em><\/p>\n A 21st-century revival of a 20th-century mistake<\/p>\n America is running a bold economic experiment. Call it Economic Trumpism. Its core is disarmingly simple:<\/p>\n No elaborate industrial policy. No bothersome planning. None of that old-fashioned stuff. Just a big, beautiful tariff wall to shield America from rapacious foreign competition. Best of all? According to the current US administration, it costs not a penny. Just the opposite: it shovels billions into the Treasury\u2019s coffers.<\/p>\n Why is this an experiment? Don\u2019t all nations apply tariffs?<\/p>\n The answer is simple. Trumpian tariffs are not the familiar tariffs aimed at protecting a favoured sector; the President has put up a tariff wall around the entire economy. And that\u2019s not something that has been tried for decades in a G7 nation.<\/p>\n From Sectoral Shield to Protectionist Wall<\/b><\/p>\n To see the distinction, recall a classic US example. As part of a trade spat with Europe, the US put a 25% tariff on imported pickup trucks. Since it was in retaliation for Europe\u2019s regulations that banned US chicken meat, the 25% tariff is still called the \u2018chicken tax\u2019. Ordinary autos weren\u2019t included, so their tariff was negotiated down to about 2.5%.<\/p>\n The asymmetry reshaped what US producers built (large pickups) and what foreign firms avoided exporting to the US. For example, Toyota largely abandoned direct export of pickups to the US and instead built factories in America to avoid the tariff. That is how narrow tariffs \u2018work\u2019: they shift resources for a few sectors.<\/p>\n But broad tariffs, covering most manufactured goods, are a different animal. They raise input costs across the board, they invite retaliation and trade diversion, they fragment supply chains, and they induce tariff-engineering (re-routing, re-labelling, re-designing to slip under the wall). The mechanism isn\u2019t a gentle nudge; it\u2019s a shove applied to every factory in the country, including those that rely on imported intermediates to stay competitive.<\/p>\n Structuralist Development Economics and Import Substitution Industrialization<\/b><\/p>\n Trump-like, high and broad tariffs were very popular in developing nations (as we called them back when they were doing it) up to the 1990s. Indeed, almost all developing nations believed that putting tariffs on everything from everyone was a winning policy. And when I say high, I mean high! Levels that would make Donald Trump blush (metaphorically). The US average tariff is set to raise to about 20% from its current 9% (it was under 3% in 2024). That is nothing compared to the standard operating procedure in Latin America by in the 1970s and 1980s (see Figure 1).<\/p>\n Figure 1<\/strong> Most developing countries had high tariff walls before 1995<\/p>\n These experiments with Trump-like tariffs failed, but there was a beautiful theory behind them \u2013 a theory that is now discredited but was, and still is, compelling in its simplicity. The economic theory behind import substitution industrialization (ISI) was laid down in the mid-20th century by economists like Ra\u00fal Prebisch and Hans Singer.<\/p>\n The economic part was quite simple: in a world where demand creates supply, putting up high tariffs shifted domestic demand from imported goods to locally produced goods. The new demand would create new domestic industry. Presto! Iindustrialization is driven by the substitution of imports with domestically made goods. That\u2019s where the name ISI comes from.<\/p>\n There was a political, or grievance, aspect of the theory as well that tended to get many people quite heated about the theory being morale as well as economically justifiable.<\/p>\n Donald Trump claims that the US is victimised by the world trade system. That is exactly how the \u2018structuralist\u2019 school viewed the world economy back then (and many still do today). It was rigged against developing nations by colonists. In one version, the rich got richer because the poor got poorer.<\/p>\n To escape this \u2018unequalising trade\u2019 trap, the advice of the structuralist development crowd was as simple as Economic Trumpism: stop importing manufactured goods, build them at home behind tariff walls, and industrialization would follow (see Prebisch 1950 or Wallerstein 1974).<\/p>\n My frequent readers will recognise this as the forerunner of Trump\u2019s \u2018grievance doctrine\u2019. Immanuel Wallerstein\u2019s world systems theory cast the global economy as an exploitative \u2018core\u2013periphery\u2019 structure. The rich, industrialised core supposedly locked the periphery into underdevelopment through colonialism, imperialism, and unequal exchange. The political conclusion was compelling: if the system is rigged, the only way out is to build walls around the national economy and force industrialization by decree.<\/p>\n Why Import Substitution Industrialization Failed<\/b><\/p>\n There was nothing wrong with the economic or emotional justification of the high, broad tariffs. The problem is that reality didn\u2019t cooperate.<\/p>\n Of course, the demand-creates-supply did work for some industries, so it seemed to be validated in the early years. ISI worked in bringing \u2018light industry\u2019 inside the tariff wall (Balassa 1981, 1985). But when it came to the more sophisticated heavy industry (autos, chemicals, machinery, electronics, etc.), the domestic market wasn\u2019t sufficient to create domestic supply. The tariffs didn\u2019t work.<\/p>\n Only a handful of nations managed to industrialize significantly, and most of those were in East Asia. But they did not rely on indiscriminate tariffs. Instead, they combined targeted protection with export discipline, state-directed credit, and careful government\u2013business coordination. Protection was temporary, conditional, and linked to performance (Amsden 1989).<\/p>\n Consumers paid high prices for low-quality goods. Export performance was dismal or entirely absent. By the 1980s, many countries that had embraced ISI were wondering about the wisdom of following a 1950s-era theory in the age of modern manufacturing.<\/p>\n As Figure 1 shows, there was a near-universal volte-face on tariffs in the 1990s. Why was that?<\/p>\n Globalisation Changed and Turned Protectionism into Destructionism<\/b><\/p>\n At the end of the 20th century, industrial protectionism turned into industrial destructionism. For developing nations, the nature of industrialization changed. Instead of keeping tariffs high to keep industrial goods out, they had to lower industrial tariffs so G7 manufacturing firms would include them in their global value chains (GVCs).<\/p>\n With the ICT revolution, production stages no longer fit neatly inside national borders; they stretch across countries. Autos are not made in America; they are made in what I called \u2018Factory North America\u2019. Autos are not made in Germany; they are made in \u2018Factory Europe\u2019. Autos are not made in Japan; they are made in \u2018Factory Asia\u2019. The whole world of manufacturing changed around 1990s.<\/p>\n In my 2016 book, The great convergence: information technology and the New Globalization<\/em><\/a>, I called this \u2018globalisation\u2019s second unbundling\u2019. (The first unbundling was goods crossing borders; the second unbundling was factories and G7 manufacturing knowhow crossing borders.) The phenomenon subsequently became known as the \u2018Global Value Chain (GVC) Revolution\u2019.<\/p>\n Indeed, it is exactly this change in the nature of globalisation that led the developing nations to abandon broad and high tariff walls.<\/p>\n Economic Trumpism in the 21st Century<\/b><\/p>\n That brings us back to 2025. Unlike the developing nations of the 1960s and 1970s, the US is already a fully industrialized, high-income economy. It does not need to \u2018force\u2019 industrialization behind tariff walls. Quite the opposite: it relies on global supply chains, advanced services, and integrated capital markets. Walling off the entire goods-producing sector is not just unnecessary, it is counterproductive. The US is in the process of hobbling its own factories, raising prices for its own consumers, and pushing investment and innovation offshore.<\/p>\n Don\u2019t take my word for it. Look at what has happened to manufacturing employment under the second Trump administration (see Figure 2).<\/p>\n Figure 2<\/strong> US factory jobs: Down on Trump\u2019s trade war<\/p>\n The basic problem is that a lack of demand is not the constraining factor in American manufacturing; it\u2019s the workforce. The group of workers who are able and willing to work on a factory floor is shrinking. Almost 400,000 manufacturing jobs are currently unfilled, according to the Bureau of Labor Statistics<\/a>.<\/p>\n Conclusion: Tools Vversus Walls, Sectors Versus Nations<\/b><\/p>\n The bottom line? Tariffs have always been political, but they usually work as tools to protect favoured sectors. They are narrow, targeted, and often effective in shaping industrial outcomes (even if those outcomes are inefficient).<\/p>\n Trump\u2019s tariffs are different. They aim to wall off the entire economy, reviving an old, discredited development strategy that failed almost everywhere it was tried.<\/p>\n So is \u2018Economic Trumpism\u2019 import substitution 2.0? Yes. And my guess is the ISI 2.0 will end the same way ISI 1.0 ended \u2013 economic failure and eventual abandonment.<\/p>\n Broad tariff walls don\u2019t build nations. If they build anything at all, they build inefficiencies. In the end, Trump\u2019s tariffs may succeed in mobilising short-run political support, but they will fail to protect American prosperity. As I said in a recent Factful Friday, \u201cTrump won politically, but America lost economically<\/a>\u201d.<\/p>\n\n
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<\/div>\nNote<\/em>: Based on World Bank data that I used in my 2016 book, The Great Convergence.<\/h6>\n
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