Import Substitution is Back

Wait for it

John Berthelsen

For anybody believing that import substitution – blocking imports to increase demand for domestically-produced goods – will produce heightened prosperity and social justice that has been wrecked by globalization, there is one answer:

That is a 2014 Hindustan Ambassador, once called “the king of Indian roads” when it was also the only car on Indian roads. It was actually a knockoff of a UK-produced 1958 Morris Minor. Except for a handful of cosmetic changes, it basically never progressed in the 56 years of production. It never needed to because there was no competition.

There is a lesson to be learned in this, and India is the poster child. For most of the years of the Ambassador’s royal reign as king of the road, India stuck fanatically to a philosophy of import substitution, which actually meant a scarcity economy.  Cars – also a Fiat knockoff called the Premier Padmini – were available in one color, and only two to three brands of cars or scooters existed in the market to choose from. Consumer goods, clothes, shoes, everything was scarce, said a Delhi-based friend.

“I remember missing Coke very much as a child as it used to be there earlier and then disappeared from shops due to government policies,” she said. “I remember sending long lists to my uncles and aunts settled in Washington, New York & London to get me chocolates, denim jeans, sports shoes, apparel, makeup. Kids in school who had relatives abroad used to bring imported stationery etc. to show off in class....I being one of them!”

Although it was protectionism rather than import substitution that created it, arguably the most grotesque American equivalent is the 1959 Cadillac El Dorado Biarritz, produced two years after the first Japanese car, a Toyota Crown, arrived in 1957 to jeers and sarcasm, although the jeers and sarcasm ended with tears. Much as Darwin’s finches on the Galapagos Islands had evolved in isolation, the Big Three automakers, with no competition, ended up with this.

The world is littered with these kinds of grotesqueries, which were allowed to flower in Russia under communism, with domestically produced refrigerators that were known to catch fire, to India, where arriving foreign correspondents were forced to bring in containers of necessities including toilet paper and toothpaste.

“My kids remember their mother bringing a McDonalds Big Mac when she flew in from Hong Kong after a visit – ‘soggy but so good!’” said John Elliott, an Asia Sentinel contributor and former Financial Times India correspondent. “There was no such thing as fast food - Wimpy, then owned by UK’s United Biscuits opened while we were there and the electricity failed at the launch in Delhi. When we ‘went out,’ we took back all electronic goods, including toys that were then developing fast elsewhere – Walkmans and cassettes, also laptops.”

Large gin bottles were turned into containers for double-boiled water stored in the fridge, Elliott said. “Kids’ bikes. Toys because “’Indian toys broke in no time.’ Shampoo and soap. For coughs and sore throats, Benylin cough mixture, Boots’ Tyrozets and other medicines. All sorts of clothes and shoes – trainers. Food like marmalade, jams, marmite, cheeses, and of course luxuries like smoked salmon and wine.”

Nonetheless, a substantial number of countries including Brazil, Argentina, and Mexico and some parts of Asia and Africa tried it to their sorrow.  The Warsaw Pact nations, in the mistaken belief that Communism could produce superior consumer goods in a closed command economy, ended up with Trabants and Ladas and clothes nobody wanted to wear while globalization, the international movement of goods, capital, services, technology and information, went on to dominate the world economy.

On a macro level, protectionism to shield domestic industry greatly encouraged rent-seeking. Governments across the world invariably picked the wrong industries to foster, creating rigid economic structures unable to react to changing world economic conditions. Discouraging imports limited customer choices and dampened the consumer economy. In many countries tax systems designed to protect shielded industries ended up distorting revenues and reducing government ability to provide social services, ending up with unequal income distribution. 

The biggest proponent of this de-linking of the global economy today is US President Donald Trump, but he has his acolytes both to the right, and to the left, who argue that globalization has resulted in unconscionable exploitation of workers despite the fact that it has brought hundreds of millions of people out of poverty and is continuing to do so.

The Covid-19 pandemic, which moved across the world with frightening speed to infect 13.6 million people and kill nearly 600,000 so far, has been described as a consequence of this global interconnectivity. But beyond that, with Trump at the helm of the US government, supply chains that worked with astonishing efficiency to move goods from China to the west have been fractured triumphantly as he has demanded that manufacturers come home.

“Our macro teams already see a protracted pause in globalization,” according to a February report by Bank of America Securities global equity research. “We argue, in a break with the past, that the world has entered an unprecedented phase during which supply chains are brought home, moved closer to consumers, or redirected to strategic allies. This would have profound implications for automation and manufacturing, and creates myriad opportunities for the geographies to which supply chains are being redirected.”

Today, Trump and his Democratic rival, Joe Biden, agree that the manufacturing jobs that fled to Asia starting in the 1950s could better be done at home. Biden earlier this month laid out a US$700 billion “Build Back Better” buy American plan that he called the biggest potential investment in the US economy since World War Two, designed to spur a manufacturing and technology jobs boom.

Trump since the start of his presidency has argued for this kind of protectionism, unfortunately doing more harm than good. The president’s decision to impose 25 percent tariffs on steel production to protect US producers is a distressing case in point, allowing domestic steelmakers to delay the shuttering of older, higher-cost integrated mills that are unable to compete with technologically advanced mini-mills. resulting in a slowdown in construction and other uses that according to the Peterson Institute for International Economics cost US consumers and businesses more than $900,000 a year for every job saved or created by the tariffs. 

Other economists estimate that tariffs on washing machines are costing consumers $815,000 for every job created.

“Sometimes old ideas return in new guises and import substitution may yet rise again,” wrote Dartmount Professor Douglas A. Irwin in 25-page paper produced by the Peterson Institute on July 8. “The lessons of past experience might temper one’s enthusiasm for the resurrection of such anti-import policies.”

So in effect, Irwin and others say, go ahead if you want to drive a new version of an Ambassador or a Biarritz while the Japanese and other economies open to competition will be driving circles around you as they did before.


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