Common Error No. 83


83. "Developing nations need tariff walls to protect their fledgling industries."

The argument goes that unless developing countries protect their industries by tariffs, they will be unable to compete with mature multinationals backed by global resources. Supporters of this position usually say that America and Europe had tariff protection in the 19th century when they were developing, and that the Asian countries which became rich only did so by protecting their infant industries.

It is true that the US and European countries had protective tariffs, but it's also true that the transport revolution of the 19th century brought trade costs down by so large an extent that the tariffs were of little importance in comparison. Some Asian success stories like South Korea, were relatively protectionist; some like Hong Kong, were relatively free trade. The market is so vibrant and flexible a source of wealth creation that you can do some things wrong and still find that it works.

But when countries have tariff barriers against imports, their own citizens are poorer, paying higher prices than necessary for goods, and having less cash to buy other things or to save and invest. Their local businesses have to pay higher prices for the materials, imported and domestic, that go into their products. Their farmers have to pay higher prices for tools, machinery and seeds. This is all so that some local manufacturers can enjoy a protected market. They do not face the impact of proper competition, or enjoy its full benefits. Instead they produce higher-priced goods that are uncompetitive on world markets.

None of this is good for developing economies. It creates an artificial economy in a protected bubble, unable to interact fully with the world beyond it, but within which some local interests are given an easier time. It's another version of the mistaken view that wealth is gained by selling exports and resisting imports, when in fact it is gained by trade.