Protection is not Helpful for Economies

Protection may be helpful for an economy in the short tem. But in long-term or permanent protection rarely does. Gita Gopinath's observation that tariffs made Americans pay more for inferior goods reminds me of a lesson India learnt the hard way before the 1991 reforms. For nearly four decades, India followed an import substitution strategy with high average tariff rates exceeding 87% by the late 1980s. The objective was to build domestic industries. The outcome was mixed. We created an industrial base, but we also created complacency. Consumers paid high prices for products that were often technologically outdated and of lower quality (we all remember the Ambassador car and years-long waiting lists for a telephone).

Tariffs reduce competitive pressure, create deadweight losses, and encourage X-inefficiency. Firms protected from global competition have fewer incentives to innovate, improve productivity, or upgrade quality. Consumer surplus falls while producer surplus rises, but society as a whole loses. That is exactly why India's manufacturing productivity accelerated only after the 1991 reforms, when tariffs were sharply reduced and competition increased.

The same story unfolded in Argentina and Brazil under prolonged import substitution. South Korea chose a different path. It protected selected industries, but linked protection to exports, productivity, and technological progress. Protection was temporary. Performance was compulsory.

The lesson is simple. Tariffs should be a bridge towards competitiveness, never a permanent destination. Countries become prosperous not by insulating firms from competition, but by making them capable of winning it.

Rajeev Upadhyay