What Latin America Can Teach Trump about Tariffs
The theory of Import Substitution Industrialization (ISI), and the high tariffs that went with it, brought about economic dysfunction and stagnation to the region.
Back in the 1950s, Latin American states tried to develop by imposing major tariffs. This model of development was called Import Substitution Industrialization (ISI). President Trump emulates Latin American politics in many ways, from his populist and personalist approach to politics to his emphasis on immigration control. The recent “Liberation Day Tariffs” also have a distinctly Latin American flavor. To see whether they will succeed, one ought to look at what happened with the original case. The bottom line is that without heavy investment by the state, ISI is bound to fail.
Import Substitution Industrialization (ISI) emerged in Latin America during the mid-twentieth century. It included the promotion of domestic industries to replace imported goods, aiming to achieve economic independence and stimulate local production.
The roots of ISI can be traced back to the economic crises and global events of the 1930s, notably the Great Depression. Latin American economies, heavily reliant on exports of primary goods, faced severe downturns as global demand plummeted. In response, many countries began to rethink their economic strategies, moving away from dependency on foreign markets and goods. The failure of the export-led growth model prompted governments to adopt ISI to foster national development.
The initial implementation of ISI was spurred by the need to create jobs, stimulate local economies, and reduce vulnerability to external shocks. Countries such as Argentina, Brazil, and Mexico took the lead in this movement, instituting policies that favored the growth of local industries. Protectionist measures, such as tariffs on imported goods and subsidies for local industries, became commonplace.
The ISI strategy involved a series of stages, beginning with the production of simple consumer goods and moving toward more complex manufactured products. In the early years, countries focused on industries like textiles, food processing, and consumer electronics. Over time, the goal expanded to include capital goods and heavy industries, such as steel and machinery.
Governments played a central role in the success of ISI. They established state-owned enterprises, provided financial support to nascent industries, and implemented protective tariffs to shield local businesses from foreign competition. For instance, Brazil’s government nationalized the steel industry in the 1940s, creating Companhia Siderúrgica Nacional (CSN) to kickstart local production.
Despite its initial successes, ISI was not without its challenges. One critical flaw was that many industries relied heavily on imported raw materials and intermediate goods, which limited the extent of economic independence. Additionally, the focus on domestic markets sometimes led to inefficiencies, as local firms faced little competition and lacked incentives to innovate.
In the initial phases, ISI produced notable successes. Countries like Argentina saw rapid industrial growth during the 1940s and 1950s, with a significant increase in manufacturing output and urbanization.
Furthermore, ISI led to the emergence of a burgeoning middle class in several Latin American countries. As industries expanded, demand for skilled labor increased, fostering education and professional development. The social fabric of many nations began to shift, with urbanization driving changes in lifestyle and consumption patterns.
However, the limitations of ISI became increasingly apparent by the 1970s. The reliance on import substitution created an unsustainable economic model that often resulted in inflation, balance of payments crises, and economic stagnation. The inefficiencies of protected industries led to high costs for consumers and a lack of innovation.
Additionally, the global economic landscape began to change, with oil crises and shifts toward globalization and neoliberal policies. As countries faced mounting debt and economic turmoil, the ISI model came under scrutiny. By the 1980s, many Latin American nations began to shift toward export-oriented growth strategies, liberalizing their economies and reducing trade barriers.
In recent years, there has been a resurgence of interest in ISI, albeit in a modified form. The COVID-19 pandemic highlighted vulnerabilities in global supply chains, prompting some countries to reconsider their reliance on imports. Latin American nations are now exploring ways to bolster local production capabilities, particularly in critical sectors such as pharmaceuticals, technology, and food security.
However, the contemporary approach to ISI is more nuanced, focusing on sustainable development and innovation rather than mere protectionism. Policymakers are increasingly aware of the need to integrate local industries into global value chains, leveraging technology and fostering partnerships to enhance competitiveness.
Trump’s tariffs are ISI for an already-developed state that fundamentally does not rely on imported raw materials. As such, the ISI model is hardly a good fit. Moreover, without large investments by the state, American ISI is not likely to succeed. This stands in sharp contrast to China, where state-owned enterprises are pillars of the economy.
There is a possibility that Trump’s tariffs are primarily political tools, not economic policy. The president may intend to give exemptions from tariffs to firms that support his larger political agenda in some way or another. If Trump can coerce such firms into large investments in key industries, they would effectively be proxies for state investment. This is a major gamble, but it is the only way that his tariff plan may work.
Diego von Vacano, PhD, MPP. is a Fellow at the Woodrow Wilson International Center for Scholars, Latin America Program and Environmental Change and Security Program. He is a Full Professor of Political Science at the Bush School of Government, Texas A&M University. Originally from Bolivia, he is writing a book on Bolivia’s lithium sector for Oxford University Press. He received his doctorate in Politics from Princeton and Master’s in economic development from Harvard’s Kennedy School.
Image: Mandel Ngan / Shutterstock.com.