The proposed imposition of tariffs and/or other trade restrictions on imported steel in order to protect the U.S. domestic steel industry evokes a long-standing dispute about the necessity and/or efficacy of protectionist policies. A number of the issues are raised in the problem itself--that this is considered a necessary industry needed by the nation, that foreign firms sell their goods in a protected domestic market, that many have subsidies by their governments, that we have to do the same to compete, and so on.
Such protectionist policies are a form of import substitution, an attempt to replace commodities that are being imported with domestic sources of production and supply. Usually, the first step is to erect stiff trade barriers or quotas on certain important commodities. The second step is to set up a local industry to produce those same goods, and typically this involves joint ventures with foreign companies which are encouraged to set up their plants with tariff protection. In this case, the local industry already exists but has not been faring well by comparison. Often, we give such industries a variety of tax and investment incentives, again mirroring what the foreign country has been doing with subsidies and tax breaks domestically. The cost of production may at first be higher than former import prices, but it is expected that the industry will in time be able to reap the benefits of large-scale production and lower costs or that the balance of payments will improve as fewer consumer goods are imported. The domestic industry is expected to grow and be able to compete in world markets, and at that point it will be able to generate net foreign-exchange earnings once it has lowered its average costs of production.
The benefits of the protectionism on which this strategy is based are arguable. Most observers find the import substitution method unsuccessful, with certain undesirable outcomes: 1) with all th...