Is Economic Trumpism Import Substitution Industrialisation 2.0?

A 21st-century revival of a 20th-century mistake.

A 21st-century revival of a 20th-century mistake.

By Richard Baldwin, Professor of International Economics @IMD

Factful Friday, 22 August 2025.

Introduction.

America is running a bold economic experiment. Call it “Economic Trumpism.” Its simplicity is breathtaking:

• Step 1: Put tariffs on everything from everywhere.

• Step 2: Hope the economy thrives.

No elaborate industrial policy. No bothersome planning. None of that old-fashioned stuff. Just a big, beautiful tariff wall to shield America from rapacious foreign competition.

Best of all? According to the administration, it costs not a penny! Just the opposite: it shovels billions into the Treasury’s coffers.

Now you know why President Trump thinks “tariff” is the most beautiful word in the dictionary.

Why didn’t anyone think of this before? Oh wait — they did. Economic Trumpism is not new. It has been tried before. And it has failed before. Not in recent times, but in ways that are well-documented.

Today’s Factful Friday argues that we shouldn’t think about Trump’s tariffs in the usual way. For half a century, tariffs have been used to protect particular sectors. The Trump tariffs, by contrast, stifle foreign competition across the entire goods-producing sector of the American economy. That difference matters. Tariffs that try to protect all sectors should not be thought of in the same way as a tariff that is aimed at protecting one sector.

Do tariffs protect sectors or nations?

Since I got my PhD in 1986, tariffs in advanced economies have been sectoral tools, not national walls. They are usually the handiwork of politically powerful industries that seek protection from foreign rivals and have the political juice to get the special treatment. I even wrote a couple of papers on that back in the day.[i]

The logic is as old as politics. Concentrated industries have strong incentives to lobby, while dispersed consumers rarely organize to complain about a few extra dollars at the checkout (Mancur Olson’s asymmetry). Lobbying is where the economics system, one dollar one vote, meets the democratic system, one person one vote. The squeaky wheel gets the grease and consumers get higher prices.

These narrow tariffs can really move the dial on production. The US auto sector offers a textbook case. Since the 1960s, Washington has put a 25% tariff on imported pickup trucks — the so-called “chicken tax.” By contrast, tariffs on regular passenger cars have been just 2.5%. That asymmetry tilted American carmakers toward large pickups and vans, a segment where they enjoyed secure domestic profits. Foreign producers, facing the 25% wall, mostly stayed out. The result? The Big Three specialised in pickups.

This is how tariffs normally work, namely as narrow shields for particular sectors.

Structuralist development economics and Import Substitution Industrialization (ISI).

The 2025 Trumpian tariffs are not focused. They are not about shielding one sector. They are about walling off the entire goods-producing part of the US economy. That is unusual. No advanced economy has attempted such broad, double-digit tariffs since the 1940s. But that’s not to say no one tried Economic Trumpism in living memory.

Trump-like, high-broad tariffs were very popular in developing nations (as we called them back when they were doing it) up to the 1990s. Indeed, almost all developing nations believed that putting tariffs on everything from everyone was a winning policy. And when I say high. I mean high! Levels that would make Donald Trump blush (metaphorically).

The US average tariff is set to raise to about 20% from its current 9% (was under 3% in 2024). That is nothing compared to the standard-operating-procedure in Latin America by in the 1970s and 1980s. See charts.

These experiments with Trump-like tariffs failed.

The Historical Echo: Import Substitution Industrialisation

If Trump’s tariff walls feel like a throwback, that’s because they are. The economic theory behind Import Substitution Industrialisation (ISI) was laid down in the mid-20th century by economists like Raúl Prebisch and Hans Singer. Their “structuralist” view held that the world economy was stacked against developing nations.

Donald Trump claims that the US is victimised by the world trade system. That is exactly how developing nations felt back then (and many still do today). It started, of course, with direct and indirect (in the case of Latin America) colonialism. Just as Britain did to its American colonies in the 1770s, western powers forced their colonies to export commodities and import manufactured goods. The "mother country", you see, controlled their tariff policy.

To escape this “unequalizing trade” trap, the advice of the structuralist development crowd was as simple as Economic Trumpism. Stop importing manufactured goods, build them at home behind tariff walls, and industrialisation would follow. See Prebisch (1950), or Wallerstein (1974).[ii]

My frequent readers will recognise this as the forerunner of Trump’s grievance doctrine. Immanuel Wallerstein’s world-systems theory cast the global economy as an exploitative “core–periphery” structure. The rich, industrialised core, he write, locked the periphery into underdevelopment through colonialism, imperialism, and unequal exchange. The political conclusion was compelling; down right Trumpian. If the system is rigged, the only way out is to build walls around the national economy and force industrialisation by decree.

Why ISI failed.

The problem is that reality didn’t cooperate with the structuralist theory. With high, broad tariff walls in place, some industries did emerge. ISI worked in bringing “light industry” inside the tariff wall (Balassa 1981, 1985).[iii] Reserving domestic demand for domestic producers could create a domestic supply of shirts. But when it came to the more sophisticated heavy industry (autos, chemicals, machinery, electronics, etc), domestic demand wasn’t sufficient to create domestic supply. The tariffs didn’t work. In the few cases where markets were big, say India, the resulting factories produced high priced goods with quality that was uncompetitive internationally.

See some examples I wrote up with Rikard Forslid a couple of years ago (Baldwin and Forslid 2023). Or a comparison of ISI in Malaysia’ failed auto industry compared to the 2nd unbundling approach of that allowed Thailand to become the “Detroit of Southeast Asia.”[iv]

Only a handful of nations managed to industrialise significantly, and most of those were in East Asia. But they did not rely on indiscriminate tariffs. Instead, they combined targeted protection with export discipline, state-directed credit, and careful government–business coordination. Protection was temporary, conditional, and linked to performance. See Amsden (1989).

In short, smart industrial policy sometimes works and tariffs are often part of that; broad tariff walls almost never do. Under ISI 1.0, sometimes called ‘infant industry’ protection, the infants usually failed to grow up.

Consumers paid high prices for low-quality goods. Export performance was dismal or entirely absent. By the 1980s, many countries that had embraced ISI were wondering about the wisdom of following a 1950s era theory in the age of modern manufacturing.

You can see from the chart that there was a near-universal volte-face on tariffs in the 1990s.

Globalisation changed and turned protectionism into destructionism.

At the end of the 20th century, industrial protectionism turned into industrial destructionism for a simple reason. For developing nations, the nature of industrialisation changed. Instead of keeping tariffs high to keep industrial goods out, they had to lower industrial tariffs so G7 manufacturing firms would include them in their global value chains (GVCs).

With the ICT revolution, production stages no longer fit neatly inside national borders. They stretch across countries. Autos are not made in America; they are made in what I called “Factory North America”. Autos are not made in Germany; they are made in “Factory Europe”. Autos are not made in Japan; they are made in “Factory Asia”. The whole world of manufacturing changed around 1990s.

In my 2016 book – The great convergence: information technology and the New Globalization – I called this “globalisation’s second unbundling”. (The first unbundling was goods crossing borders; the second unbundling was factories and G7 manufacturing knowhow crossing borders.) It phenomenon subsequently become known as “The Global Value Chain (GVC) Revolution”. I reproduce a key passage from that book in the Annex.

Indeed, it is exactly this change in the nature of globalisation that led the developing nations to abandon broad and high tariff walls. Note that lowering tariffs didn't lead to industrialisation in vast majority of cases since the G7 manufacturing firms choose to offshore manufacturing stages to a handful of near by developing nations: China in Asia, Mexico in North America, and the central European nations in Europe. Read all about it in my 2014 paper with Javier Lopez-Gonzalez.

Economic Trumpism in the 21st century.

That brings us back to 2025. Unlike the developing nations of the 1960s and 70s, the US is already a fully industrialised, high-income economy. It does not need to “force” industrialisation behind tariff walls. Quite the opposite: it relies on global supply chains, advanced services, and integrated capital markets. Walling off the entire goods-producing sector is not just unnecessary, it is counterproductive. Especially harmful is the way the US is raising the cost of imported inputs like steel and aluminum. I'd guess that the US is now the most expensive place on the planet to manfacture many types of goods. The US is in the process of hobbling its own factories, raising prices for its own consumers, and pushing investment and innovation offshore.

Don’t take my word for it. Look at what has happened to manufacturing employment under the second Trump administration (see chart).

Seen in this light, Trump’s “tariffs on everything” look less like a coherent industrial strategy and more like political theatre. The walls may protect grievances, but they won’t protect prosperity.

Conclusion: Tools vs. Walls, Sectors vs. Nations

The bottom line? Tariffs have always been political, but they usually work as tools to protect favoured sectors. They are narrow, targeted, and often effective in shaping industrial outcomes (even if those outcomes are inefficient).

Trump’s tariffs are different. They aim to wall off the entire economy, reviving an old, discredited development strategy that failed.

Q: So is “Economic Trumpism” import substitution 2.0? A: Yes. And my guess is that ISI 2.0 will end the same way ISI 1.0 ended – economic failure and eventual abandonment.

Broad tariff walls don’t build nations. If they build anything at all, they build inefficiencies. In the end, Trump’s tariffs may succeed at protecting Trump politically. But they will fail at protecting American prosperity.

Or, as I said in my 31 July 2025 Factful Friday: “Trump won politically, but America lost economically.”

Annex: ICT Revolution, the 2nd unbundling and the New Globalisation.

NB: This is verbatim from the manuscript of my 2016 book.

Conventional thinking views globalisation as the process – driven forwards by falling trade and communication costs – that is integrating national economies around the world. A central assertion of this book is that the Information and Communication Technology Revolution (ICT) fundamentally changed globalisation.

The logic of how ICT transformed globalisation is simple but understanding it requires some background. Start with the facts.

Globalisation leaped forward from the early 1800s when steam power and global peace lowered the costs of moving goods. Globalisation made a second leap in the late 20th century when ICT radically lowered the cost of moving ideas.

As Figure 1 shows, the effects of these two globalisation processes were dramatically different. From 1820 to 1990, globalisation fostered economic agglomeration and growth in today’s advanced economies. During this ‘Great Divergence’, the G7’s share of global output rose from a fifth to two-thirds. This is the first globalisation process – the one that inspired the conventional view of globalisation.

Figure 1: Globalisation – one process or two?

From the beginning of its modern incarnation in 1820 to the early 1990s, globalisation fostered a clustering of economic activity in the G7 nations. Since then, the G7 has tumbled back to its 1900 level. This shocking-share-shift suggests that one should think of globalisation as two processes, not one.

Source: World Databank (GDP in US dollars) and Maddison data pre 1960 with author’s calculations.

From 1990, the trend flipped and the G7 share is rapidly retreating. A century of the G7’s rise has been reversed in just two decades. This is the second globalisation process.

Curiously, post-1990 globalisation has massively transformed only a couple dozen nations. Turning the focus to global manufacturing shares, Figure 2 shows that the G7 nations – who had been losing share slowly since 1970, witnessed an accelerated decline from 1990.

Figure 2: The G7’s share losses went to just ten rapidly industrialising nations

The ‘shocking share shift’ in manufacturing production is almost as stark as the shocking shift in world GDP shown in Figure 1. Just ten nations – which might be called the ‘Rising 10’, or R10 for short – account for almost all of the G7’s decline. The R10 are China, Korea, India, Poland, Indonesia, Thailand, Ireland, Malaysia, Singapore and Turkey.

Source: UNSTAT.org;

The G7’s share loss, however, showed up as share gains in very few nations. Only seven nations – call them the Rising 10 or R10 for short – saw their share of world manufacturing rise by more than a half of a percentage point. Even among these big share-gainers, the expansions are very uneven; China alone picked up twice as much as the other R7 combined. The whole rest of the world – marked as RoW in the chart – saw little change.

The curiosity lies in the fact that the effect is so concentrated. Why should the impact of globalisation be so narrow geographically when transportation and communications are so cheap?

A new narrative: Three cascading constraints

A second central assertion of this book is that the two globalisation processes and the persistent importance of distance are best understood in what might be called the ‘three cascading constraints’ view of globalisation. As will become clear, the three constraints are related to the costs of moving goods, ideas and people.

Pre-globalised world

From the dawn of civilisation right up till the 1800s, most production and consumption were bundled together spatially. When transportation involved wind power by sea and animal power by land, few items could be profitably shipped over anything but the shortest distance. Apart from elite goods and essential raw materials, most things that most people consumed were made within walking distance. Of course, princes, priests and pirates could enjoy goods made far away – and history books tend to dwell on these vivid characters – but most people lived in villages and for them consumption meant locally-made food, shelter and clothing.

The high costs of shipping goods formed a ‘glue’ that kept production spatially bundled with consumption. Transportation, in other words, was the constraint that hindered globalisation for most of human history.

Steam Revolution relaxes the transportation constraint

During what historian Eric Hobsbawm calls the long 19th century, transport technologies improved in a process that fostered and was fostered by the Industrial Revolution. Lower shipping costs combined with the security that came with British supremacy of the high seas started to loosen the transportation constraint.

As trade costs fell, more people bought faraway goods. Britishers could afford to dine on bread baked with US wheat while sipping tea brewed from Chinese leaves and sweetened with Jamaican sugar – all set on a tablecloth made of Indian cotton.

This opening of markets created import competition and export opportunities that shifted national production patterns. Increasingly, nations specialised in producing goods where their relative efficiency was highest while importing goods where it was lowest. Economists Kevin O’Rourke and Jeffery Williamson date this first globalisation process to the 1820s.

It is useful to think of this first process as globalisation’s first ‘great unbundling’. Cheaper transportation melted the glue that bundled consumption together with production. Since trade is what happens when goods are made in one nation but consumed in another, international trade boomed.

Second constraint – cost of coordinating complexity

While relaxing the transportation constraint had revolutionary effects, it did not spell the death of distance. Paradoxically, production micro-clustered within nations even as it dispersed internationally. Manufacturing shifted from villages and cottages to factories and industrial districts

The paradox is resolved by noting that the micro-clustering was driven by the cost of moving ideas, not goods.

The ability to sell to world markets shifted the advantage to firms operating at previously unknown scales of production. Large-scale manufacturing techniques are much more complex and this had implications for its spatial organisation. As it turned out, managing the complexity was easier, cheaper and surer when all stages of production were gathered in tight proximity. Factories, in other words, were built to reduce the costs of coordinating large-scale manufacturing processes – not to save on trade costs.

To put it differently, relaxing the transportation constraint did not make the world flat. It brought the world economy up against a second constraints – the coordination constraint. Distance started to matter in new ways.

The Great Divergence

As history would have it, the G7 nations specialised in manufacturing and this launched them into a virtuous helix. Industrial agglomeration fostered innovation that fostered competitiveness and this, in turn, promoted further agglomeration of industry in G7 nations.

Industrialisation also triggered income growth that boosted the size of G7 domestic markets. The helix twirled upwards as the bigger markets led to more agglomeration, innovation, and competitiveness.

Since know-how moved internationally with great difficulty, G7 productivity gains stayed national. G7 incomes rose much faster than the world average. This ‘Great Divergence’ yielded enormous gaps between incomes and wages in the North (mostly Western Europe, North America and Japan) and the South (developing nations).

The ICT Revolution would change this by making it easier to move know-how internationally.

ICT Revolution relaxes the coordination constraint

In the late 1980s, revolutionary advances in the transmission, storage and processing of information drastically lowered communication costs. Coordinating complex activities over long distances became easier, cheaper and surer. In this way, the ICT Revolution melted the glue that had forced the spatial bundling of manufacturing stages.

Once geographical separation of production stages became feasible, the vast North-South wage-gap made it profitable. Many G7 firms unbundled their factories and offshored some production stages to low-wage nations. This was globalisation’s 2nd great unbundling – the unbundling of G7 factories.

Why globalisation’s impact changed

The ICT Revolution ended the need to perform most manufacturing stages in close proximity. It did not end the need to coordinate them. To ensure the whole process remained in harmony, G7 firms moved their knowledge abroad along with the offshored stages. The complex flows of goods, information, services, and people that used to happen only inside G7 factories were now part of international commerce. Intra-factory flows became international flows, as Figure 3 illustrates schematically. This is why ICT transformed globalisation.

Figure 3: The 2nd unbundling created new North-to-South knowledge flows

Falling trade costs in the 19th and 20th century’s stimulated trade directly and clustering within factories indirectly, as shown in the top panel. Low cost shipping favoured complex, large-scale production. Given the high communication costs, it was expensive to coordinate such complexity at distance, so even as industry dispersed across nations, it micro-clustered inside factories. From about 1990, the ICT Revolution relaxed the coordination constraint and the micro-clusters unbundled across North-South borders. As a result, some stages – Stage B in the stylised representation in the bottom panel – were offshored to nearby low-wage nations. This changed the nature of globalisation since it meant that the G7’s most advanced firms were combining their know-how with low wages in developing nations. The new, North-to-South flows of know-how transformed globalisation’s impact. In this sense, globalisation’s 2nd unbundling meant factories crossing borders, not just goods crossing borders as in the 1st unbundling.

Source: Author’s elaboration.

The most momentous aspect of globalisation’s transformation was the new North-to-South flows of know-how. The G7’s most productive firms combined their marketing, managerial and technical know-how with low-wage labour – especially in China – and this completely transformed global manufacturing.

The agglomeration-innovation helix that had shifted shares to the G7 during the 1st unbundling started spiralling in reverse with immense torque. The R7 nations industrialised at rates that dwarfed those that the G7 enjoyed in the 1st unbundling and this triggered historically unprecedented income growth.

Since almost half of humanity lives in the R7, their growth take-offs sparked commodity booms that boosted exports and growth take-offs in commodity-exporting nations around the world.

In a sense, today’s North-to-South knowledge flows are rebalancing an imbalance created during the 1st unbundling. In 1990, the G7 nations had a fifth of world population but the lion’s share of the world’s know-how. With the help of ICT-enabled GVCs, know-how is flowing from nations with lots of technology and few people to nations with lots of people and little technology. An analogy can be usefully drawn with the 19th century experience that saw Europeans from nations with lots of people and little land moving to the New World which had few people and lots of land.

In a nutshell, pre- and post-1990 globalisation had radically different effects since the 1st and 2nd unbundlings affected technology in radically different ways. The 1st unbundling spurred the development of productivity-boosting knowledge in the G7 nations and this knowledge stayed local. The 2nd unbundling made it feasible for G7 firms to leverage their know-how by combining it with low-wages in developing nations. The resulting knowledge flows have gone some way towards redressing the world’s labour-technology imbalance and this transformed globalisation’s impact.

Amsden, A. H. (1989). Asia’s next giant: South Korea and late industrialization. New York: Oxford University Press.