12.4: Protectionist Model

The Protectionist Model

As you probably have guessed from its name, the protectionist model (also known as import substitution) requires that countries sustain themselves without significant trade with other countries. Protectionist policies are applied to safeguard domestic companies from foreign ones. The theory behind this strategy is grounded in the idea that over-reliance on foreign labor, products, and/or services can be detrimental to national sovereignty and/or security. As such, the strategy became very popular among countries that gained independence after many years of imperialism and colonization. India, Jamaica, the Philippines, the former Yugoslavia, the former Soviet Union, and most countries in the Caribbean and in Africa embarked up this strategy from the 1950’s-1980’s. Yugoslavia, for example, produced its own car, called a Yugo, and India did the same. These automobiles were designed to be affordable for domestic consumers, but in both cases the strategy failed to produce a reliable, affordable product and left consumers without access to better alternatives imported from Germany, Japan, or the U.S. Protectionism is closely tied to nationalism in many cases as politicians and/or consumers ask the basic question, “Why don’t we take care of ourselves, by ourselves, rather than depending on workers and producers from other parts of the world?” How does this question relate to your own opinions about whatever country you live in or were born in? Does the argument make sense to you?

By the 21st century, the vast majority of countries in the world turned away from protectionism as a strategy in favor of adopting an international trade oriented economy. Nonetheless, protectionism does offer certain advantages worthy of consideration such as:

1. More controlled decision-making
2. Benefits spread to more members of society
3. More government involvement
4. Food security

Decision-making by governments can be more controlled and policy decisions can be easier to make and policies can be designed to benefit and spread to more members of society under protectionism. Until 1993, for example, corn farmers in Mexico were protected from cheap corn produced in the U.S. and Canada, because of restrictions on imports. Most of the millions of small-scale corn farmers in Mexico could grow enough corn for their own families and produce a small surplus to be sold locally, providing a small but meaningful wage for millions of families. Protecting farmers from outside competition offered a measure of predictability, political stability, and food security from one year to the next. Mexico is also blessed with generous reserves of oil and traditionally the government has controlled domestic oil and gas prices, which again can bring a certain level of predictability to consumers as opposed to the wild shifts in prices that can often accompany imported oil.

Disadvantages to this isolationist strategy are probably apparent to you as you read and think about this topic. A few of them are listed here:

• Susceptibility to corruption, inefficiency, and slow response to market conditions
• Lacking in creativity and innovation
• Absence of natural resources in some places necessitate trade to meet demand

When a government protects a company from outside competition, there is a tendency for that company to become susceptible to corruption. Since 1938 a single oil company called Pemex had exclusive rights to drill, process, and sell oil within Mexico, which provided a huge source of revenue, protected jobs, and helped build national pride. In recent decades, however, the company increasingly found itself entangled in one scandal after another involving bribes, kickbacks, and various schemes that have kept gasoline prices at the pump artificially high. In 2013, however, Mexico began reforms known as market liberalization (a process of removing barriers to foreign-owned companies from operating and competing with domestic ones), allowing BP, Shell, and other companies to import petroleum and open gas stations in certain parts of Mexico. Such a shift is having a serious impact upon the national landscape both symbolically and materially as residents have a choice between competitors for the first time in 80 years!

Figure | Nationally Owned/Operated Gas Stations in Mexico Author | User “Diaper” Source | Flickr License | CC BY 2.0

Aside from corruption, another drawback to isolationism is the lack of creativity and innovation that otherwise comes from fierce competition. Venezuela, a country that has resisted international trade in favor of protectionism, currently is suffering from massive shortages in food and other necessary consumer items as domestic producers have failed to innovate and respond to consumer demand. Meanwhile, global supply chains of rice, beans, corn, tomatoes, mangoes, coffee, sriracha sauce, and fidget spinners have constantly evolved, innovated, and changed to efficiently provide for the demands of consumers internationally whether they happen to be in Sydney, Seoul, Santo Domingo, or Sao Paulo! It is very difficult for governments to plan for and anticipate the needs of an entire society for any length of time. Protectionism requires a government that can match consumers and producers efficiently, a task often handled much better by free-market forces than by public officials.

The final element that makes protectionism so problematic rests in simple geography. All countries have different conditions related to site, situation, climate, or natural resources, so trade isn’t just advantageous but rather it is essential to survival. An extreme case can be found in North Korea, a country with notoriously tightly controlled borders. Without trade the country routinely fails to produce enough rice, leaving millions desperate and undernourished. Likewise, China faced similar droughts, food shortages, and periods of starvation when it favored protectionism for most of the 20th century, but it began to reverse its strategy as it cautiously opened its economy to the rest of the world in the early 1980’s.