Import Substitution

When I consider import substitution, the main thing that occurs to me is that this idea has been around for a long time. Mercantilism was based on a lot of the same basic concepts: mainly, export without much importing, and do for yourselves within the country, don't rely on trade. But what also remains true is that while import substitution and trade policies like may have short-term benefits, in the long run they are always damaging to the countries that enact them.

The problem with import substitution is in its most basic assumption. In order to replace imports with domestically produced items, a country has to have the resources available to do so. On the simplest level, one of the reasons we have trade is that not all countries have the same raw materials available. The United States, for example, isn't going to have the best luck growing its own coffee plants. It can be done. There are species of coffee plants that don't need have such limited requirements for growth. The this is, they generally don't make the best tasting coffee. And that brings me to the next issue of import substitution: quality.

It's all very well for a country to say it's going to make what it needs itself, and perhaps only import those few raw materials that just aren't available within its borders. However, different countries have varying levels of technology available to them. They can only create within their own limits. And without competition from more advanced countries, the technological advancement is much slower.

There is a reason that the theory of comparative advantage replaced mercantilism. Why should a country waste its labor and capital resources manufacturing inferior products? If that capital is instead invested into those industries in which the country has a comparative advantage, jobs will be created in those industries.

To me, import substitution feels a lot like a small child at the playground who says to his friends, "I don't need you, I can have fun all by myself." A limited comparison, I know, but it's true all the same. I think it represents the crippling shortsightedness of most people. People tend to act in their own self-interest. But there are a lot of different ways to improve one's condition. That's the whole point of comparative advantage. Sure, the U.S. may be more efficient at producing both cotton and wine than the U.K, but if the U.S. does nothing but produce and export, and the U.K. does nothing but import, eventually the U.K. is going to run our of capital with which to purchase both wine and cotton. The U.S. loses because it runs out of outside customers, and is producing more than its own people need, and the U.K. loses because its people have no jobs and the country has no money. That's import substitution. Every country in the world wants to run a trade surplus, all of the time. Why wouldn't they? Who doesn't want to be making more money than they're spending. But it's not a sustainable reality.

It's true that import substitution has benefited countries in certain situations for a limited time, for example, Japan after World War II. But it makes sense for an injured country to curl into a corner and lick its wounds after a situation like that. And now Japan is one of the dominating forces in the international economy.

Trade policy has to be flexible. A country needs to be able to respond to the world as it changes. Blindly adopting a policy of import substitution will bring a country's economy down. In the BRICS countries import substitution was briefly helpful, but sticking with those policies for too long inevitably led to damage. Economic development requires competition, true access to the factors of supply and demand, and most importantly, international interaction. Without these things economies with stagnate. Too many trade policies are created for short-term benefits. If countries don't start taking a much longer view the world is never going to truly move forward.