• Matthew Smylie

Analysing the merits of protectionism: the Argentinian case

With the election of Trump and widespread popular dissatisfaction with the effects of globalisation, there has been a sudden resurgence in protectionism as nations have turned against free trade and have become increasingly inward looking. This article seeks to critically analyse the merits of protectionism, employing Argentina as a case study.

Photo Credit: https://voxeu.org/content/why-dont-governments-do-away-protectionism


Recently there has been a shift away from the dominance of free trade, with nations around the world, most noticeably the United States, becoming more protective of their domestic industries. As economic conditions have declined, protectionism has been promoted as the remedy for economic woes; providing jobs, cultivating competitive industries and fostering economic growth. Yet, protectionism has also fostered fear in the minds of many, projecting images of unbearable living costs, complacent businesses and economic stagnation.


This post will critically analyse the merits of protectionism. It does so with a detailed inspection of the Argentine economy, tracing how protectionist policies have, or have not, provided benefits to this Latin American giant. The core argument of this paper is that protectionism, in the Argentine case, has not transformed the nations ‘comparative advantage’ and has failed to produce a highly diverse economy; Argentina continues to rely on its agricultural sector whilst its manufacturing industries remain uncompetitive and inefficient. Consequently, Argentina now lags behind many of the countries that it was outperforming at the start of the twentieth century.


This is not to say that protectionism has derived no benefits at all. Tariffs have helped the Argentine government to raise state revenues at a time when the taxation system was underdeveloped, whilst also helping to reduce debt during the Latin American crisis. Protectionism has also served the interests of elites, being used throughout Argentina’s modern history to generate political support and maintain power whilst also creating high rents for landowners. Additionally, protectionism has been crucial in terms of employment, creating and maintaining jobs for citizens, although it has also resulted in higher living costs and lower product standards. Thus, protectionism has provided short-term merits to different groups in Argentine society but has failed to deliver on the long-term goal of transforming the economy from an agro-producer to an industrial superpower.


Free Trade vs Protectionism


Protectionism, in the form of mercantilism, dominated western European economic thought and trade policy between the sixteenth and late eighteenth century (LaHaye, 2008). Mercantilism was fundamentally concerned with how to raise the wealth and power of the nation; to this end, prominent mercantilist thinkers including Fortrey and Jansen demonstrated support for nationalist economic strategies such as tariffs and import restrictions in order to exclude foreign competition and increase the competitiveness of the domestic economy (Magnusson, 2007: 56). It was hoped that by achieving a favourable balance of trade, whereby increasing amounts of manufactured goods were exported, and foreign imports were restricted, the nation would see a large inflow of wealth and grow prosperous (Ibid).


Mercantilism’s dominance came to an end with the publication of Adam Smith’s The Wealth of Nations in 1776. Smith held a pessimistic view of mercantilist policies, arguing that ‘to widen the market and to narrow the competition, is always the interest of the dealers’ (Smith, 2000: 348). These mercantilist policies were viewed as promoting the interests of merchants and business owners, rather than the nation as a whole. Smith advocated for free trade policies, arguing that an international division of labour whereby nations specialised in goods that they held an absolute advantage in, and then traded with one another, would raise the wealth of nations (Schumacher, 2012: 19). This is the theory of absolute advantage; countries produce the goods which they can make at the lowest cost relative to other nations and then trade with one another, creating greater material wealth (Schumacher, 2012: 22).


Smith’s concept of absolute advantage was furthered by David Ricardo, culminating in the theory of comparative advantage. Ricardo argued that all nations could benefit from free trade, regardless of how advanced they were or how their productivity compared to other countries (Irwin, 2017: 7). Rather than advanced nations with an absolute advantage in all goods producing and exporting everything, they should instead produce goods in which they hold a comparative advantage; goods which they produce relatively efficiently. Thus, even nations who have poor productivity and lack capital can gain from trade, by producing those goods in which they have the least comparative disadvantage relative to their trading partners (Ibid). Consequently, international trade organised according to each nation’s comparative advantage will lead to increased growth and wellbeing for all.


Despite the predicted virtues of Smith’s and Ricardo’s ideas, free trade theories and policies have been met with fierce criticism, most prominently from Friedrich List. For List, comparative advantage was not conducive to long-term development because it was focused on static efficiency in the allocation of resources rather than dynamic elements that would see countries grow and develop (Shafaeddin, 2000: 2). List envisaged that countries transitioned through stages of development, moving from the savage and pastoral states to a stage in which agriculture dominated, followed by periods of industrialisation and manufacturing before reaching a stage of free trade (Datta, 1973: 59). However, List argues that these transitions could not occur naturally through market forces but required state intervention in the form of protectionist policies (Shafaeddin, 2000: 5). As such, List followed the earlier work of Alexander Hamilton in advocating infant industry policies. These policies, taking the form of tariffs, subsidies and government regulations would protect and nurture domestic industries until they were efficient and competitive enough to compete in the free market (Samaro, 2009: 5). Such policies were a necessary evil in the move towards ‘massive export expansion and ultimately free trade’ (Shafaeddin, 2000: 18). Protectionist policies would, therefore, foster economic growth, create jobs and develop successful national industries.


Similar protectionist sentiments have been forwarded by Prebisch and Chang. Prebisch argued that the global economy is an exploitative system in which the industrial centre dominates the agrarian periphery (Love, 1980: 45). The main issue was that ‘the price of primary products tended to decline relative to those of manufactured goods’ (The Economist, 2009) meaning that industrial nations gained much more from a regime of free trade than the developing nations that were still dominated by agricultural production. As such, ‘the state would have to intervene actively to promote a form of industrialization’ (CEPAL, 2018) in the periphery nations to diversify the economy and relinquish its reliance on agricultural goods. In practice, this would take the form of ISI policies which aim to replace imports with domestically produced goods. Points regarding the inequity of the world trade system have been echoed by Chang (2003) who argues that the developed countries used protectionist policies to achieve their current privileged state but have since ‘kicked away the ladder’ by making the developing nations subscribe to a world of free trade. Thus, both Prebisch and Chang argue that global free trade is inherently unfair and promote protectionist policies as the way to close the gap between the world’s developed and developing nations.


The merits of protectionism extend beyond issues of economic growth and the development of domestic industries. Riezman and Slemrod (1987) show how tariffs and export taxes can be important sources of state revenue, especially when alternative revenue-generating channels impose high costs. Further, public choice theories demonstrate how politicians can gain from protectionist policies by pandering to the demands of interest groups, such as declining industries, because they receive political support in response enabling them to remain in office (Coughlin et al, 2000: 312). As such, protectionism also derives benefits to particular groups in the economy, protecting jobs and raising rents in certain industries at the expense of consumers (Krueger, 2004).


The preceding theoretical perspectives predict that there are numerous merits of protectionism. Policies including tariffs, subsidies and, increasingly, non-tariff barriers in the form of regulations are predicted to help developing countries expand their capabilities; achieving industrialisation and diversifying their economies before opening up to free trade. Simultaneously, protectionism is also predicted to provide jobs and generate government revenue, improving the lives of citizens. Beyond economic considerations, protectionism can serve political goals, helping elites to maintain power and allowing interest groups to insulate themselves from threat. The following sections investigate the realisation of these merits, focusing on protectionism in Argentina.


The case of Argentina


Argentina provides a rich case study to analyse the merits of protectionism. Firstly, Argentina holds a comparative advantage in the production of agricultural goods due to its skewed factor endowments; a large supply of fertile land in relation to its population size coupled with a lack of coal and iron for industrial usage (Gerchunoff & Llach, 2009: 405). As such, we would expect that in a free trade environment, Argentina would specialise in agricultural products, whilst relying on imports of manufactured goods. Thus, Argentina provides a good example of a country that would struggle to develop an industrial sector in the absence of public policies (Gerchunoff & Llach, 2009: 407). Indeed, protectionist policies have been used throughout Argentina’s modern history, with the purpose, form and extent of these policies changing over time. Resultantly, there is plentiful evidence in Argentina’s case which can be used to analyse the merits of protectionist policies.


Further, Argentina has undergone many changes in the last 150 years. Political and institutional instability has dominated, with rapid regime changes and multiple coups (Lee, 1969). Such instability provides a good example to test the political merits of protectionism, analysing how elites have used policies to gain support for regimes. Argentina is also unique in that it ‘is arguably the only nation to have both successfully converged and later significantly diverged from the rich in the modern era’ (Gerchunoff & Llach, 2009: 398). Argentina, therefore, provides a rare case study of how a nation has drastically fallen behind its competitors in the global arena. More recently, Argentina has become a member of MERCOSUR; a trade bloc that facilitates regional trade but maintains strong barriers to protect its industries (Bown & Tovar, 2016). This allows for an analysis of the outcomes of protectionism in the present day. The following sections will trace Protectionism in Argentina over the last 150 years, analysing the merits of these policies.


1870-1930


The period between 1870 and 1930 has been described as Argentina’s belle époque’ (Tena-Junguito & Willebald, 2013: 29). During this time, Argentina was able to exploit its comparative advantage in producing agricultural goods, following an ‘agro-export model’ in which it exported a vast amount of agricultural products whilst importing manufactured goods (Chudnovksy & Lopez, 2007: 17). The Argentine economy received a huge boost with the development of transportation technology, including railways and refrigerated shipping; allowing the nation to become a major exporter of beef, corn and wheat (Lovering, 2007: 6). This export-oriented growth resulted in Argentina becoming one of the world’s most prosperous nations, with GDP growth surging at over 4% per annum (Solberg, 1973: 260) and wages matching those of Britain (Bailey, 2016). Exports of primary products continued to boom despite a downturn during the First World War, with nearly 40% of total goods produced being exported during the 1920s (Solberg, 1973: 260). However, whilst Argentina exploited large gains from an export-led model, its underlying structure failed to transform; it had not become a modern industrial power unlike those it had surpassed in terms of wealth (Bailey, 2016).


Whilst this period of rapid export-led growth may appear as an era of free trade for Argentina, relatively substantial ‘protectionist’ measures were still in place with tariffs averaging over 20% before World War One and 18% in the post-war setting (Brambilla et al, 2018: 10). However, Irwin (2002: 166) argues that these tariffs were ‘not designed to promote industrialisation based on import substitution’ but were designed as a tool to raise government revenue. The imposition of high tariffs during the late nineteenth and early twentieth centuries was a result of Argentina’s widely dispersed population which made other revenue-generating schemes, including income tax, both infeasible and unenforceable (Irwin, 2002: 168). The importance of tariffs as a revenue-generating tool was highlighted during the First World War when a sudden decline in imports sliced the Argentine state’s revenue by nearly one-third (Solberg, 1973: 264). Thus, while Argentina was benefiting from an export-led model of growth, a key merit of protectionism during this period was to generate state revenue.


Generating state revenue was not the only motivation behind protectionism during this period. Protectionist policies were also used for political purposes, enabling elites to maintain power by protecting the interests of important industries including wine and sugar (Rodriguez, 1974: 8). In the case of the sugar industry, a poor harvest in 1916 and 1917 resulted in President Yrigoyen maintaining tariffs against imported sugar so as to maintain the support of the Northwest, where many relied on the sugar industry for their livelihoods, as well as influential investors who owned sugar refineries (Solberg, 1973: 267). Maintaining protections for the sugar industry enabled Yrigoyen to sustain governorship of Tucumán Province, but also came at huge costs to Argentinian consumers as sugar scarcity led to soaring prices (Solberg, 1973: 268). This shows that one of the key merits of protectionism was political; insulating certain industries from outside competition enabled elites to source votes and maintain support for their regimes, but this came at a cost for wider society as living costs soared.


There were, nonetheless, attempts at fostering infant industries. A key example was the shoe industry which achieved high profits but relied on tariffs to compete in the domestic market (Pineda, 2003: 7). At face value, this appears as an attempt by the Argentine government to insulate its inefficient but profitable shoe industry from foreign competition, fostering its development. However, Solberg (1973: 264) highlights the political nature of these tariffs. The highly influential Sociedad Rural, whose membership was dominated by landowners and cattle fatteners, had lobbied for protections on industries that used cattle by-products in light of export markets drying-up (Solberg, 1973: 265). Thus, protectionism afforded to footwear manufacturing was not directed at building a strong national industry but was rather imposed to benefit the land-owning elite. Many other infant industries suffered from a lack of protectionism, particularly the metal industry which suffered from capital shortages (Johns, 1992: 198) and free trade policies enacted by President Alvear that promoted the export of scrap metal, thus denying the metal industry of crucial raw materials (Solberg, 1973: 277). This suggests that protectionist policies were misguided, captured by political interests, but could have been highly beneficial to Argentina had they been applied correctly.


1930-1975


Following the period of relatively free-market policies and export-led growth, Argentina turned inwards. The initial movement towards more protectionist policies, in the form of higher tariffs and exchange rate controls, had occurred in the wake of the Great Depression which had shocked the economy and convinced many that the key to growth was to abandon reliance on global import-export markets (Lovering, 2007: 3). However, protectionism only came to dominate post-1945 with the election of Juan Perón who brought ISI strategies to the forefront. The Peronist governments set out two 5-year plans which aimed to develop heavy industry, basic input industries and an automotive industry (Brambilla et al, 2018: 13). This would require the cultivation of ‘domestic production facilities to manufacture goods that were previously imported’ (Baer, 1984: 124). To this end, Perón enacted ISI policies that would promote domestic production to serve local markets, insulating industries from foreign competition thus allowing them to grow. This involved a proliferation of measures including; tariffs, import quotas and subsidies. Indeed, the process of ISI was deepened by the subsequent Frondizi and Illia governments (Brambilla et al, 2018: 13). Resultantly, the 1930-1975 period is understood as a highly protectionist era where ISI strategies dominated.


The ISI strategies imposed have been celebrated, with prominent scholars arguing that these policies had a positive impact on Argentina’s economy. Rodrik (1999: 68) points to the fact that ISI strategies created profitable domestic markets, thus incentivising investment and industrialisation with the effect of creating strong per capita GDP growth rates of 2.29% between 1960 and 1973. Further, ISI strategies led to successful industrial expansion as firms accumulated technological and organizational capabilities and the inflow of MNC’s exposed Argentine industries to Fordist production methods (Katz & Kosacoff, 2000). This is supported by the fact that the automotive sector grew substantially during the sixties and seventies, becoming the sixteenth largest automobile exporter in the world with an output of 293,742 units in 1973 (Catalan, 2010: 218). Thus, ISI strategies appear to have been effective in leading Argentina’s industrialisation, transforming the nation’s capabilities and providing fairly strong growth figures.


However, the ISI strategies deployed by Argentina were rife with problems which prevented the successful creation of strong Argentine industries. Using the automotive industry as an example again, the investment promotion policies of the ISI strategy proved futile as car factories opened but soon closed down again due to weak domestic demand (Chudnovsky & Lopez, 2007: 48). Consequently, the automotive industry became increasingly concentrated and lacked competition between firms. Further, the high and persistent levels of protection afforded to industry, coupled with the lack of foreign competition, resulted in technological stagnation and poor productivity rates (Miozzo, 2000: 656). As such, high levels of protectionism resulted in highly inefficient industries, with Argentina achieving dismal total factor productivity growth of just 0.2% between 1960 and 1973 (Rodrik, 1999: 72). Yet, the poor performance was not only in terms of efficiency but also in terms of the quality of output, with Argentinian consumers receiving more expensive and inferior products (Lovering, 2007: 15). Therefore, whilst ISI strategies did create growth in Argentine industries, they failed to create competitive industries that would be sustainable and able to survive in the global market.


Simultaneously, a major impact of the ISI strategy was its negative effect on the agricultural sector. This was due to the fact that the ISI strategies exhibited an anti-export bias in which agriculture was taxed at very high rates, averaging 29% (Cavallo & Mundlak, 1982: 59), with the export rents being transferred to the manufacturing sector in the form of cheap credit and subsidies (Chudnovsky & Lopez, 2007: 35). Resultantly, this anti-agricultural bias led to stagnation in which export markets dried up and Argentina’s agricultural industries lagged behind the rest of the world (Brambilla et al, 2018: 25). Thus, a direct result of Argentina’s protectionist strategies was to significantly impede the growth of the industry in which it held a comparative advantage.


Further, it is possible to view Argentina’s movement away from export-led growth and towards ISI policies during this period as being motivated by political rather than economic considerations (Bendini, 2012: 2). In the initial shift towards ISI, Perón had, in part, enacted these policies to satisfy the unions on which his power was built (Lovering, 2007: 11). Thus, rather than choosing ISI policies out of their economic virtues, Perón had, to an extent, enacted these measures to build support for his regime. The commitment to protectionist policies during this period continued to pay political dividends for successive governments on two counts. Firstly, protectionism, whilst harmful to growth, maintained employment and high wages in the short-run thus generating political support from the working class (Gerchunoff & Llach, 2009: 399). Secondly, export tariffs were a quick and easy way for governments to maintain price stability and reduce deficits (Lovering, 2007: 16). Therefore, much like the late nineteenth and early twentieth centuries, a key merit of protectionism was political; protectionism allowed political elites to promote the interests of particular groups within society in order to build and maintain power.

1975-2000s


Following the period of ISI strategies, Argentina underwent a shift towards neoliberal principles, rapidly liberalising its economy. The military junta which came to power in 1976 acknowledged the failure of ISI strategies and went about a rapid restructuring of the economy; liberalising tariffs, deregulating finance and promoting a laissez-faire approach with the aim of increasing the competitiveness of the most productive sectors (Lewis, 1999: 48-49). This economic liberalisation continued under the Menem regime in the early 1990s, as Argentina conformed with the IMF and GATT goals of reducing tariffs and eliminating non-tariff barriers (Cooney, 2007: 12). As such, the last quarter of the twentieth century has been described by Cooney (2007) as a period in which neoliberal economic policies dominated Argentine politics and policies.


The sudden exposure to the global market appears to confirm the idea that the previous protectionist policies had failed in building efficient and competitive Argentine industries. With a decline in protectionism and a sudden influx of cheap imports, the manufacturing industries suffered huge losses causing an almost unprecedented contraction in manufacturing output between 1975 and 1990 (Lewis, 1999: 42). In particular, the automotive industry experienced significant problems, as lower real protection caused output in 1978 to be just 62% of what it had been five years prior; this resulted in many firms either exiting Argentina or restructuring their activities (Catalan, 2010: 220). Thus, the absence of competitive industries was highly damaging for Argentina once it had been exposed to the world market. Real per capita GDP fell by over 20% (Bailey, 2016), whilst trade deficits soared during the 1990’s, contributing to increasing debt problems (Cooney, 2007: 21). Further, the process of trade liberalisation brought huge costs in terms of jobs, with hundreds of thousands of workers made redundant and unemployment expanding from 6% to 14% between 1991 and 1999 (Cooney, 2007: 24). This alludes to the fact that protectionism had been key in insulating industries and protecting jobs but failed in its mission of producing industries that could compete globally.


However, it would be inaccurate to blame Argentina’s dismal economic performance during this period of liberalisation purely on its protectionist past. This is because Argentina’s experience in the late 1970s, throughout the 1980s and into the early 1990s was one of ‘high social unrest and macroturbulence’ (Katz & Kosacoff, 2000: 308). A key factor here was inflationary shocks; price inflation remained very high in Argentina between 1975 and the 1990s, averaging over 100% per annum (Glaeser et al, 2018: 16); this caused Argentine products to become much less competitive and weakened the economy. Similarly, the 1991 Convertibility Plan, which pegged the peso to the US dollar and fostered a strong inflow of capital, lead to a strong appreciation of the peso (Gallo, 2012: 55) which further hampered Argentina’s exports. Therefore, whilst the inefficient industries inherited from the ISI period were uncompetitive relative to foreign competition, the negative impact of protectionism is only one factor in explaining the contractions in manufacturing output, employment and growth between 1975 and the 2000s.


Further, it is important to acknowledge that protectionist measures were not absent during this period and, in fact, played an important role in stabilising the Argentine economy during the 1980s. In 1982, Mexico defaulted on its debt; the result was the Latin American debt crisis in which Argentina also defaulted and was shut out of international capital markets (Braun, 2006). In response, Argentina increased tariffs, imposed import quotas and withheld manufacturing subsidies to produce a trade surplus that would help to repay its increasing debts (Casaburi, 1998: 13). In terms of evidence, World Bank data shows a substantial improvement in Argentina’s net trade in goods and services, increasing from -3.285 billion US dollars in 1981 to 4.342 billion US dollars in 1985 (World Bank, 2018). Thus, protectionism played a role in stabilising the Argentine economy during the Latin American debt crisis by helping to constrain imports, thus averting the accumulation of more debt before the arrival of IMF stimulus packages (Casaburi, 1998: 13).


Recent Experience


Following Argentina’s period of economic liberalisation, it has once again become more protectionist. Despite strong export growth during the early 2000s, crippling inflation after 2005 turned the economy inwards as Argentina began to shelter its industries from foreign competition (Bendini, 2012: 2). Protectionism in Argentina escalated following the 2008 financial crisis, with the government enacting more opaque policies such as stiffer technical barriers, safety regulations and ‘buy national’ policies (Kim, 2013) to support the domestic manufacturing sector. Thus, whilst president Macri seeks to make the Argentine economy more outward-orientated, Argentina maintains many barriers to trade.


Argentina does derive benefits from a more liberalised trading regime through its continued membership of the trade bloc; MERCUSOR. Here, integration with Latin American neighbours has resulted in a reduction of tariff and non-tariff barriers, increasing the volume of exports and imports with the consequence of improvements in GDP and economic growth (Campbell, 2012: 41). However, MERCOSUR maintains substantial protective barriers to shield its domestic industries, with Argentina as well as Brazil determined to shield industries such as vehicle manufacturing from foreign competition (Stratfor, 2017). In the case of the automotive industry, tariffs of 35% have been imposed by MERCOSUR, and the bloc continues to stall on a trade agreement with the EU through the fear that domestic manufacturers would be unable to compete in the global market (Stratfor, 2018). As a result of this protectionism, MERCOSUR, of which Argentina is a key constituent, suffers in comparison to more liberal Latin American economies. This is supported by the finding that since 2010, MERCOSUR members have achieved growth rates over 10 percentage points lower than its more open neighbours Mexico and Peru, while also experiencing less investment and higher inflation (Turner & Kiernan, 2016). Thus, the continuance of protectionist measures in Argentina continues to harm its economy.


Yet, protectionism extends well beyond car manufacturing, impacting upon numerous industries. A key example in the present-day context is the Argentine electronics industry where a 35% tariff is applied to all imported electronics with the aim of building a ‘made in Argentina’ electronics manufacturing hub (Turner & Kiernan, 2016). Indeed, the electronics industry remains very weak, relying on the import of components from East Asian economies (Machinea & Castro, 2017: 199). Consequently, the Argentine electronics industry is highly inefficient; this means that purchasing electronic products in Argentina is very costly, forcing domestic consumers to travel to neighbouring Chile where they can buy goods for half the price (Gillespie, 2016). Yet, the tariffs have been highly beneficial in terms of employment, creating thousands of jobs and insulating workers from East Asian competition where labour costs are substantially lower (Turner & Kiernan, 2016). This shows that infant industry policies continue to be used in Argentina and continue to produce mixed results; they provide short-term virtues in terms of job creation but result in inefficient industries without a future (Cohen, 2017) and huge prices for Argentinian consumers.


Argentina’s lack of successful modern industries, and its continued reliance on agriculture demonstrates that protectionism has not had the desired effect of transforming the Argentine economy. This extends well beyond the electronics and automotive industries to areas including textiles and footwear where goods from Asia continue to undercut domestic producers (Stratfor, 2017). Consequently, Argentina continues to rely heavily on its natural comparative advantage; agro-production, with the agro-food sector comprising 17.6% of Argentina’s GDP and processed agricultural goods making up 62% of total exports as recently as 2014 (Phélinas & Choumert, 2017). The issue is that advances in technology have reduced the real value of agricultural output, with food and primary products falling in real value whilst manufactured goods have risen in value (Glaeser et al, 2018: 12). This means that Argentina continues to specialise in goods that are of fairly low value, whilst importing high value-added goods, such as machinery and electronics, from other nations. Thus, the failure of protectionism to achieve successful industrialisation explains, in part, why Argentina has diverged from the rich states in the last century, falling behind nations such as the United States which have successfully diversified their economies (Beattie, 2009).


Conclusion


This article investigated Argentina’s history of protectionism to critically analyse the merits of protectionism. Initially, the merits of protectionism were outlined; the theories of List and Prebisch were highly influential and sat in contrast to the free trade theories of absolute and comparative advantage forwarded by Smith and Ricardo respectively. Both List and Prebisch argued that protectionism was necessary to help nations transition from agro-production into an industrial powerhouse. From Prebisch’s perspective, protectionism was particularly important in helping ‘periphery’ nations successfully industrialise; halting their reliance on primary exports, achieving better terms of trade and reducing their dependency to the industrial ‘centre’. Thus, the key merit of protectionism was long-term; it promoted a diverse, industrialised economy capable of sustained growth. Yet, other, more short-term merits were highlighted. Protectionism was highlighted as an important revenue collecting mechanism, especially where other forms of state revenue collection are costly. Public choice theories also outline how political victories can be achieved by protecting certain interests and sectors in the economy.


The key argument of this article is that the long-term merit of protectionism, that trade barriers would create a successful industrialised and diverse economy, has not been realised in Argentina’s case. By the beginning of the twentieth century, Argentina had become one of world’s wealthiest nations having followed an export-led growth model which it focused on its comparative advantage in agriculture. However, following the Great Depression and the election of Perón, Argentina turned inwards and began a period of ISI which promoted the development of domestic industries, particularly the automotive industry. However, these strategies, whilst providing growth and industrialisation to an extent, constrained the agricultural sector and failed to create efficient and competitive industries. This was evident when the nation liberalised post-1975; its industries were uncompetitive on the global stage, although the legacy of protectionism was only one contributory factor to Argentina’s decline during this period. Consequently, present-day Argentina, which remains highly protectionist, continues to rely on its original comparative advantage in agriculture and has fallen significantly behind the nations which it had outperformed a century ago.


Yet, benefits were derived from protectionism in Argentina. Pre-1930, tariffs acted as an important tool in generating government revenue in a nation where the population was widely dispersed. Further, infant industry policies during this period benefitted the Argentinian land-owning class, enabling them to insulate industries that were a key source of income. Moreover, political benefits were derived from protecting the sugar industry, showing how Yrigoyen was able to maintain power by protecting certain groups in society. This political benefit was again exhibited during the Perón years, where it is argued that the government enacted ISI strategies to appease the unions. Further, protectionism was shown to be a useful tool in stabilizing Argentina’s debt during the Latin American debt crisis. Finally, protectionism continues to provide both benefits and setbacks to Argentinians. Barriers to trade shield the highly inefficient electronics and automotive industries from foreign competition, thus maintaining urban-sector employment. Yet, these policies also result in high prices and poor-quality products for consumers. In sum, protectionism has delivered short-term virtues but has failed to deliver on its long-term promise.


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