Import Substitution

A protectionist strategy employed by some (primarily developing) nations to help foster the growth of local industries.

Let's say a country's populace enjoys the benefits of, say, refrigerators. However, there are no domestic fridge manufacturers, meaning that all iceboxes must be imported from abroad. In this case, a country may take steps to encourage the founding of local refrigerator companies through tax or other incentives and simultaneously establish tariffs on imports of foreign refrigerators. In this way, the new domestic firms are given a fighting chance to grow instead of being forced to compete with potentially much larger and more mature foreign corporations.

There are several downsides to this strategy, of course. First, the products produced by smaller, local companies are likely to be more expensive and of lower quality than comparable imported models, thus putting the bulk of the economic strain on the consumers. Second, foreign governments may choose to respond to an import substitution regime with tariffs of their own, and these could stifle the growth of domestic exporters. Since this second point may not come into play until the domestic economy has grown in strength, import substitution is generally employed by countries with little or no export sector. A notable exception to this pattern is India, which has worked at import substitution for some time despite their maturing status.

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While I am personally not very convinced of the long-term merits of import substitution, I do think that themusic is right when he points out that it is always the dominant trading powers that tend to favor free trade. This was as true of Britain in the 19th century as of today's US. Ain't that always the way?

If my memory is clear--and the disappearing of collective memory of industrial organization is an effort of modern industrial public relations--this was the foundation of Canada's industrial strategy for much of our our history. Among the upsides of this policy, was the growth of an industrial base that created many high-paying jobs for Canadians through the establishment of large industrial concerns, such as Canadian Pacific, and Massey-Ferguson.

Just another example of the power a national government has to shape its own economy, all sadly relinquished in the name of free trade--that rarely lives up to its name--except for the dominant power.

Maybe the trade off of several large enterprises that employ many in high-paying jobs for one--say Nortel Networks--is a good one; of this I am unconvinced.