Does Protection Work?

The US followed the British example. In fact, the first systematic argument that new industries in relatively backward economies need protection before they can compete with their foreign rivals—known as the "infant industry" argument—was developed by the first US treasury secretary, Alexander Hamilton. In 1789, Hamilton proposed a series of measures to achieve the industrialisation of his country, including protective tariffs, subsidies, import liberalisation of industrial inputs (so it wasn't blanket protection for everything), patents for inventions and the development of the banking system.

Hamilton was perfectly aware of the potential pitfalls of infant industry protection, and cautioned against taking these policies too far. He knew that just as some parents are overprotective, governments can cosset infant industries too much. And in the way that some children manipulate their parents into supporting them beyond childhood, there are industries that prolong government protection through clever lobbying. But the existence of dysfunctional families is hardly an argument against parenting itself. Likewise, the examples of bad protectionism merely tell us that the policy needs to be used wisely.

In recommending an infant industry programme for his young country, Hamilton, an impudent 35-year-old finance minister with only a liberal arts degree from a then second-rate college (King's College of New York, now Columbia University) was openly ignoring the advice of the world's most famous economist, Adam Smith. Like most European economists at the time, Smith advised the Americans not to develop manufacturing. He argued that any attempt to "stop the importation of European manufactures" would "obstruct… the progress of their country towards real wealth and greatness."

Many Americans—notably Thomas Jefferson, secretary of state at the time and Hamilton's arch-enemy—disagreed with Hamilton. They argued that it was better to import high-quality manufactured products from Europe with the proceeds that the country earned from agricultural exports than to try to produce second-rate manufactured goods. As a result, congress only half-heartedly accepted Hamilton's recommendations—raising the average tariff rate from 5 per cent to 12.5 per cent.

In 1804, Hamilton was killed in a duel by the then vice-president Aaron Burr. Had he lived for another decade or so, he would have seen his programme adopted in full. Following the Anglo-American war in 1812, the US started shifting to a protectionist policy; by the 1820s, its average industrial tariff had risen to 40 per cent. By the 1830s, America's average industrial tariff rate was the highest in the world and, except for a few brief periods, remained so until the second world war, at which point its manufacturing supremacy was absolute.

-Protecting the Global Poor

Related;
For a discussion see the Prospect blog
The Real Lessons for Developing Countries from the History of the Developed World

Listen to an interview on BBC

More good sense from Martin Wolf