In recent years, anti-market policies, such as tariffs and industrial policies, have resurged in popularity in the United States. Advocates for these measures submit they are essential to protecting domestic industries, fostering economic growth, and ensuring national security. However, historical evidence and economic analyses tell a different story—one in which these policies often fail to deliver their promised benefits. To understand why, we will examine the historical failures of tariffs in the United States and the ineffectiveness of industrial policies in Japan and China.
Tariffs and the US
Tariffs have long been a contentious tool of economic policy in the United States. Proponents argue they shield domestic industries from foreign competition, enabling growth and job creation. Yet, the historical record, as illuminated by scholars like Douglas Irwin in his study “Tariffs and Growth in Late Nineteenth Century America,” demonstrates that tariffs often hinder economic progress more than they help.
During the late nineteenth century, the United States maintained some of the highest tariff rates in its history. While this period coincided with rapid industrial growth, Irwin argues that tariffs were not the primary driver of economic expansion. Instead, technological innovation, abundant natural resources, and a growing domestic market played far more significant roles. High tariffs distorted resource allocation, favoring inefficient industries over more competitive sectors. This misallocation led to higher consumer prices and suppressed overall economic welfare.
Further evidence from Alexander Klein and Christopher M. Meissner’s research—“Did Tariffs Make American Manufacturing Great: New Evidence from the Gilded Age”—reinforces this perspective. Their study highlights how tariffs weakened competition in manufacturing by protecting inefficient firms, which inevitably inhibited productivity. While tariffs protected nascent industries like steel and textiles, they did so at the expense of consumers and other industries reliant on affordable inputs. The result was a less dynamic and less competitive economy.
The adverse effects of tariffs extend beyond economic inefficiency. High tariff barriers often provoke counter-measures from trading partners, leading to trade wars that exacerbate economic instability. The Smoot-Hawley Tariff Act of 1930 is a quintessential example. Enacted during the onset of the Great Depression, it conducted widespread retaliatory tariffs from US trading partners, further shrinking global trade and entrenching the economic downturn.
Douglas Irwin’s article, “Does Trade Reform Promote Economic Growth?: A Review of the Evidence,” further highlights the limitations of protectionist policies. His analysis reveals that trade liberalization—not protectionism—is consistently associated with higher economic growth. By reducing barriers to trade, economies can reallocate resources to more productive sectors, enhance competition, and promote innovation. The evidence strongly suggests that countries embracing open trade policies experience faster and more sustainable economic progress than those that rely on tariffs to shield domestic industries.
Industrial Policy in Japan
Beyond tariffs, industrial policies have also been heralded as tools to spur economic development. Yet, the experiences of Japan and China reveal the limitations and unintended consequences of such policies. Japan’s post-war economic recovery is often cited as a triumph of industrial policy. During the 1950s and 1960s, the Japanese government actively intervened in the economy, directing investment and promoting specific industries. However, as Richard Beason’s analysis in “Japanese Industrial Policy: An Economic Assessment” shows, the narrative of industrial policy success is overstated.
Beason’s research highlights that Japan’s rapid growth during this period was primarily driven by factors unrelated to industrial policy, such as high savings rates, a well-educated workforce, and the diffusion of technology from abroad. While industrial policy initially supported growth in targeted sectors, it often led to inefficiencies over time. Government efforts to pick “winners” frequently resulted in the misallocation of resources, with politically-connected firms receiving disproportionate support regardless of their economic viability.
By the 1990s, Japan’s industrial policies had become a liability. The prolonged economic stagnation known as the “Lost Decade” was partly attributable to the structural distortions created by decades of government intervention. Instead of fostering innovation and competitiveness, industrial policies entrenched inefficient firms and industries, making it difficult for Japan to adapt to changing global economic conditions.
Industrial Policy in China
Likewise, China’s recent industrial policy initiative—“Made in China 2025”—aims to transform the country into a global leader in high-tech industries. However, evidence from Lee G. Branstetter and Guangwei Li’s study, “Does ‘Made in China 2025’ Work for China? Evidence from Chinese Listed Firms,” suggests that these policies face significant challenges.
Branstetter and Li’s research indicates that the initiative has had mixed results. While government subsidies and support have boosted production in targeted sectors, they have also encouraged inefficiency and rent-seeking behavior. Firms receiving subsidies often prioritize meeting government mandates over pursuing genuine innovation or market-driven strategies. This misalignment of incentives has limited the policy’s effectiveness in fostering sustainable growth.
Moreover, “Made in China 2025” has faced considerable backlash from international trading partners, leading to heightened geopolitical tensions and trade disputes. The policy’s protectionist elements and explicit goals of displacing foreign competitors have raised concerns about market distortions and the erosion of fair competition. These tensions have not only undermined global trade relations but also created uncertainties that hinder long-term economic planning.
Conclusion on Tariffs and Industrial Policy
The failures of tariffs and industrial policies in the United States, Japan, and China underscore the broader limitations of anti-market economic strategies. These policies often stem from the belief that governments can outmaneuver markets in allocating resources and driving innovation. Yet, as history repeatedly demonstrates, markets are better suited to these tasks.
Markets excel at aggregating dispersed information, aligning incentives, and fostering competition. When governments intervene through tariffs or industrial policies, they disrupt these mechanisms, leading to inefficiencies and unintended consequences. For instance, while tariffs may provide short-term relief to struggling industries, they ultimately impose costs on consumers and other sectors of the economy, undermining overall prosperity.
Similarly, industrial policies often suffer from the problem of “government failure.” Policymakers lack the information and incentives needed to consistently identify and support the most promising industries. Instead, their decisions are often influenced by political considerations, leading to favoritism and resource misallocation. The experiences of Japan and China vividly illustrate these pitfalls, showing how government intervention can entrench inefficiency and stifle long-term growth.
The resurgence of tariffs and industrial policies in contemporary economic discourse is troubling given their historical track record. Evidence from the United States, Japan, and China reveals that these policies frequently fail to deliver on their promises of economic prosperity. Rather than fostering growth and competitiveness, they distort markets, misallocate resources, and provoke retaliatory measures that harm global trade.
To build a thriving and dynamic economy, policymakers should resist the allure of anti-market interventions and instead focus on creating an environment conducive to innovation, competition, and free trade. By learning from the lessons of history, we can avoid repeating the mistakes of the past and chart a more prosperous future.
