Protectionism and growth: a question of equilibrium(s)

Since his return as president of the United States, Donald Trump - an emblematic proponent of protectionism - has intensified efforts to raise tariffs on imports from countries such as China, Canada, Mexico, and the European Union. The goal is to boost American production, by making imported goods more expensive.

However, protectionist policies can have significant secondary effects. Higher prices on imports reduce consumers’ purchasing power and raise production costs for businesses, leading to lower investment and slower economic growth. To mitigate these effects, the government can intervene in various ways, by providing subsidies to industries affected by rising raw material costs for example, offering tax relief, or promoting innovation to enhance local competitiveness.

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During his first term, Trump imposed a 25% tariff on steel and a 10% tariff on aluminium. Shortly after, Ford estimated that these measures added $1 billion to its production costs. The U.S. auto industry, however, later benefited from the Inflation Reduction Act (IRA), a $370 billion initiative passed under Joe Biden in 2022 to support green industrial policy, including incentives for domestic electric vehicle production.

The United States, through its economic power, has no difficulty in cushioning the costs associated with protectionism by taking on debt on international markets. But what happens when an emerging country decides to erect customs barriers? This is the question posed by economic researchers Nastasia Henry and Alain Venditti in the scientific article "On the (de)stabilization role of protectionism" published in 2024 in the Journal of Mathematical Economics.

Behind the Scenes of Emerging Economies

Emerging economies are often burdened with high public debt, and face challenges in securing loans from financial markets. They require substantial funding to develop infrastructure, education, and healthcare systems. Additionally, many of these countries run trade deficits, importing more than they export. Their ability to finance public debt is constrained, however, as financial markets view them as "risky" due to their high debt levels.

In this context, some governments in emerging economies see protectionism as a viable development strategy. By raising tariffs on imported goods, they can generate additional tax revenue, which provide valuable help for in financing public investments.