AP® Comparative Government and Politics · Unit 5 · Topic 5.5
Import Substitution and Trade Strategy
Import substitution industrialization is a strategy where a government raises tariffs on imported goods so domestic producers, shielded from cheaper foreign competition, can grow into their own industries.
A government that wants a domestic industry to exist has a problem: if foreign firms already make the same good more cheaply, nobody will buy the local version. Import substitution industrialization solves this by making imports deliberately expensive, usually through tariffs, so citizens are pushed toward buying the domestically made alternative even though it costs more or works less well at first.
The mechanism is straightforward. A tariff is a tax on imported goods, so raising it raises the price of the foreign good at the register. As that tariff climbs, say from 5 percent to 40 percent, consumer prices for the imported version rise sharply, and buyers shift toward domestic substitutes even if those cost more than the foreign good did before the tariff. Domestic output rises because local firms now face demand that used to go abroad. This is called infant industry protection: give a young industry room to grow without being undersold while it builds the scale and skill to compete later.
The catch is that protection was only ever supposed to be temporary. A firm that never has to compete with cheaper or better imports has no pressure to cut costs or improve quality, so it can stay inefficient indefinitely, propped up by the tariff wall rather than standing on its own. This is why joining the World Trade Organization changes everything: membership requires lowering tariffs on a schedule, which strips away the very wall import substitution depended on, forcing protected industries to finally face the competition they were built to avoid.
Key terms
- Import substitution industrialization
- A strategy of using tariffs or other barriers to replace imported goods with domestically produced ones.
- Tariff
- A tax placed on imported goods that raises their price to consumers.
- Infant industry protection
- Temporary shielding of a new domestic industry from foreign competition so it can grow before competing openly.
- World Trade Organization
- An international body whose members agree to lower tariffs and open markets to foreign competition on set schedules.
Watch it explained
- How it worksHow does an import substitution strategy try to grow domestic industry behind a tariff wall?
- Worked exampleShow me consumer prices and domestic output moving as a tariff rises from 5 to 40 percent.
- Common mistakeWhy isn't protecting an infant industry a permanent solution?
- Going furtherWhat happens to an import substitution policy when the country joins the World Trade Organization?
Check yourself
End of topic.