And So It Begins

And so it begins. A recent article in the Wall Street Journal (Republican Senators Try to Curb Influence of Trump Tariff Hawk, February 17, 2025) noted that corporate CEOs are flooding their senators and representatives with pleas for carve-outs and exemptions from President Trump’s vague and constantly mutating tariff policies. This is completely understandable.

Let me explain. President Trump’s tariffs and other economic policies are intended to convert the US economy from a free market economy to an import substitution economy. In an import substitution economy, domestic goods are protected from foreign competition. Business leaders hate competition. In a free market economy businesses must compete with each other not only on price but also on quality. The only winners from competition are consumers. The US economy was designed to be a free market economy as described in Adam Smith’s authoritative book, The Wealth of Nations and that is the reason that America is the most prosperous and powerful country in the history of the world.

I have lived in countries with import substitution economies. When I lived in Mexico in the 1980’s the country was still dominated by the Partido Revolucionario Institucional or PRI. Imported cars were horrendously expensive and Mexican-made cars were shoddy clunkers. As I noted in my earlier commentary, A Fox in the Henhouse (June 10, 2024) the only way to get affordable televisions were smuggled goods found at the Tepito market. It took months to get a telephone line installed by the government-owned TelMex (although a quicker installation could be “arranged”). A lot of things could be arranged in Mexico back then. All it took was la mordida (the “Bite”).

But corruption in a country with an import substitution economy is not limited to mordidas to a cop to fix a traffic ticket or to a TelMex worker to install a telephone line or to a government bureaucrat to issue a permit that would otherwise languish for many months (if it did not somehow get lost). Import substitution regimes are inherently corrupt. Corrupt to the core. Because the success or failure of a company is no longer determined by consumers but by government. If you think the problem in the US is that wealth controls the government just wait until the government controls the wealth.

The problem with import substitution is human nature. Free market economies are successful because millions of consumers and thousands of producers enter into voluntary economic transactions where each party is acting in their own self-interest. The buyer buys because acquiring the product is in his self-interest and the seller sells because it is in her self-interest because she makes a profit from selling the product. Both sides gain. Win-win. But within an import substitution regime consumer demands are replaced by government edicts. The self-interest of producers is now directed to government demands instead of consumer demand. Because consumer demand is not a relevant factor there is little competition among domestic producers to lower the cost or improve the quality of products. And without competition there is little reward for innovation but only in meeting government specifications.

The leaders of import substitution regimes tell the people that tariffs will give them good paying jobs. And that may be true at first. But the tariff protected economy slows and workers suffer. At the turn of the twentieth century Argentina was the fifth wealthiest country in the world blessed with ample resources and a rich countryside. But thanks to Juan Peron and his import substitution regime the country became a poverty-stricken basket case and a serial defaulter on its public debt. Government handouts and subsidies cause the public debt to soar. The Mexican and Argentine import substitution economies collapsed resulting in the infamous Lost Decade.

So the only way to maximize profits in an import substitution economy is not to build the better mousetrap but to influence government. Tariffs to protect your products from competition. Carve-outs to protect your supply lines. Import substitution is rife with crony capitalism as the Wall Street Journal reported in The French Billionaire Working His Trump Ties to Spare His Luxury Empire (February 19, 2025). The CEOs and their lobbyists are peregrinating to Mar-a-Lago to pay homage to the ultimate dispenser of holy carve outs and sacred tariffs. And the constantly changing tariff rates, the starting dates and their postponements, the adding and subtracting of which products and industries will be affected only clarifies in the minds of our pilgrims the source of all that power. And the sacrificial offerings to the clerisy surrounding that power can make the difference between salvation and damnation.

Like socialism, import substitution looks better on paper than in real life. So, if import substitution regimes give the people shoddy products and high prices, make imported goods ridiculously expensive and foreign travel prohibitive, fosters crony capitalism and causes an uncompetitive economy to slow down, wages to stagnate, and getting anybody to do anything requires a little bite, then why would anybody recommend changing a free market economy for an import substitution economy? Maybe all that bowing and scraping to government power has something to do with it.