Economic Nationalism — The Case For and Against

Why It Matters

Economic nationalism is one of the most contested concepts in economic policy, and it is the subject of genuine disagreement among serious economists, not just political shouting. Understanding what the strongest arguments on both sides actually are — rather than the weakest versions that partisans usually argue against — is essential to forming your own view.

The debate became more intense after the 2016 US election, the COVID supply chain disruptions, and the growing strategic competition between the US and China. Policies that had been considered settled — free trade is good, protection is costly — were reopened. Even mainstream economists who had long dismissed industrial policy began reconsidering whether some version of strategic protection was defensible for specific industries.

The history of protection is a necessary part of this conversation. Smoot-Hawley is the canonical cautionary tale: a sweeping tariff enacted in 1930 that raised duties on more than 20,000 imported goods, triggered retaliatory tariffs from trading partners, contributed to a collapse in global trade, and almost certainly made the Great Depression worse. Economists cite it as an example of exactly how not to do protection. But the lesson from Smoot-Hawley is not that all protection is always wrong — it is that blanket, politically-driven protection that ignores retaliation is destructive.

A more nuanced picture requires distinguishing between types of protection. Protecting domestic steel production because a country needs steel to build military equipment is different from protecting steel to preserve jobs in a swing-state industry. Subsidizing domestic semiconductor manufacturing because adversary nations control the supply is different from subsidizing domestic shoe manufacturing because foreign competition is uncomfortable. The category matters. The design matters. The economics matters.

A Story

Steel Tariffs, 2018

In March 2018, the Trump administration announced tariffs of 25 percent on imported steel and 10 percent on imported aluminum, citing national security grounds under a rarely-used trade law. The announcement was immediately controversial.

US steel producers were pleased. The American steel industry had been struggling for decades against competition from lower-cost foreign producers, particularly from China, where the government had subsidized steel production to the point that China was producing roughly half the world’s steel output while having overcapacity. Steel companies like Nucor and US Steel saw their stock prices jump when the tariffs were announced. US Steel announced it would restart idled blast furnaces. Some estimates suggested the tariffs would save or create 10,000 to 25,000 jobs in the domestic steel industry.

US manufacturers who used steel as an input were not pleased. American automakers, appliance manufacturers, construction companies, and oil pipeline producers all used large amounts of steel in their products. Now they faced paying 25 percent more for a critical input. Ford Motor Company estimated the tariffs would cost it $1 billion per year in higher raw material costs. A manufacturer of oil storage tanks in Texas announced it was laying off workers because it could no longer compete on price with manufacturers in countries that did not face the tariff.

An economic analysis by the Peterson Institute for International Economics estimated that for every one job saved in steel production, roughly six jobs were lost or threatened in steel-using industries. Steel employed about 140,000 workers in the US. Steel-using industries employed about 6.5 million workers.

The tariffs also triggered retaliation. Canada, the European Union, Mexico, and other trading partners imposed their own tariffs on US exports — targeting politically sensitive goods like bourbon whiskey, motorcycles (Harley-Davidson), denim, and agricultural products. Kentucky bourbon distillers and Wisconsin dairy farmers found themselves paying the price for a tariff that was supposed to help steelworkers.

Steel prices in the US rose. By late 2018, US hot-rolled steel coil was trading at roughly twice the world market price. Companies that relied on steel faced a choice: raise prices and risk losing customers, absorb the cost and lose margin, or move production abroad to avoid the tariff. Some small and mid-size manufacturers did all three.

By 2021, the Biden administration had largely kept the steel tariffs in place while negotiating modified arrangements with the EU and UK. The tariffs had become part of the trade landscape rather than an emergency measure. The domestic steel industry remained intact. Whether the national security justification held up under scrutiny, whether the cost-benefit tradeoff was positive, and whether the retaliation damage was worth the protection gained remained actively debated.

The steel tariff story does not have a clean ending. Steelworkers held onto jobs they might otherwise have lost. Manufacturers and consumers paid higher prices. Trading partners retaliated. Some industries were hurt badly. The tariffs did not trigger a Smoot-Hawley-style trade war, but they did demonstrate that protection in one industry creates losers as well as winners, and that those losers include workers and companies who had nothing to do with steel.

Vocabulary

Economic nationalism

A policy approach that prioritizes domestic production, employment, and industrial capacity over global economic efficiency. It typically involves tariffs, subsidies, local content requirements, and other measures that favor domestic producers.

Tariff

A tax on imported goods. Tariffs make foreign goods more expensive, protecting domestic producers from foreign competition but also raising prices for domestic consumers and businesses that use the imported goods.

Smoot-Hawley

A US tariff law passed in 1930 that raised duties on more than 20,000 imported goods. Trading partners retaliated, global trade collapsed, and the law is widely cited as having deepened the Great Depression. It is the canonical example of destructive blanket protectionism.

Industrial policy

Government action to shape the development of specific industries — through subsidies, tax incentives, tariffs, or direct investment. Industrial policy ranges from the CHIPS Act (subsidizing domestic semiconductor manufacturing) to Smoot-Hawley-style broad protection.

Strategic industry

An industry whose domestic production capacity is important for national security, economic independence, or technological leadership, beyond ordinary commercial considerations. Semiconductors, pharmaceuticals, and defense equipment are commonly cited examples.

Retaliation

When a country responds to another country’s tariffs by imposing its own tariffs on the first country’s exports. Retaliation is a standard response to protection and often means that the country imposing protection faces export losses as well as the intended import substitution.

Guided Teaching

Let’s build the strongest version of the case for economic nationalism first, before examining the counterarguments.

The national security argument is the most defensible. Some goods are so critical to military and emergency capacity that depending on foreign producers — especially adversarial ones — is genuinely dangerous. Semiconductors are the clearest modern example: they are essential to military equipment, and the US had allowed most production to concentrate in Taiwan and South Korea. If a military conflict severed that supply, the US would be in serious trouble. This argument is not about economics. It is about strategic vulnerability. Even free-trade economists who reject most protection often accept this argument for a narrow category of genuinely strategic goods.

The community and labor argument is real, though economists debate its weight. When an industry employs a large number of workers in specific communities, and those workers cannot easily transition to other industries, there is a legitimate case that protecting those jobs has social value beyond the economic calculation. The deindustrialization lesson showed what happens when that argument is ignored. At the same time, protection is an expensive way to preserve jobs, and the cost is borne by other workers and consumers.

The infant industry argument has a historical track record. Many of the world’s most successful industrial economies — the US in the nineteenth century, Germany, Japan, South Korea — used substantial protection to develop domestic industries before they were competitive. The US itself was highly protectionist for most of its industrial development. The argument is that without protection, a new domestic industry will be undercut by established foreign competitors before it has time to achieve the scale and efficiency needed to be competitive. The limitation is that “infant” industries often never grow up and the protection never ends.

Ask: if the US decided today to rebuild domestic semiconductor manufacturing from scratch, and had to compete against TSMC which has been making chips for thirty years and has enormous scale and expertise, how long do you think it would take to be competitive without subsidies? Is there a version of the infant industry argument that makes sense here?

Now the case against, starting with Smoot-Hawley. The 1930 Tariff Act raised duties on over 20,000 products. Trading partners retaliated with their own tariffs. US exports collapsed. Global trade fell by about 65 percent between 1929 and 1934. While the Depression had causes beyond trade policy, most economists believe Smoot-Hawley made it significantly worse. The lesson: broad, politically-driven protection that ignores retaliation is dangerous.

The consumer price argument is direct: tariffs raise prices for everyone. The 2018 steel tariffs raised the price of steel in the US to roughly twice the global price. Every manufacturer that uses steel — appliance makers, carmakers, construction companies — paid more. Those costs were either absorbed (reducing profit and investment) or passed to consumers (raising prices for goods). The workers in steel-using industries who lost jobs because their employers could not compete were real people with real losses, just as the steelworkers who kept their jobs were real people.

The government-picks-winners problem is serious. Industrial policy requires governments to decide which industries deserve protection. This creates intense lobbying pressure as every industry argues it is strategic. In practice, protection often goes to industries with good lobbyists, not industries with genuine strategic importance. Smoot-Hawley is the extreme version of this: it protected everything because every industry's lobby pushed for its inclusion. The result was catastrophic.

The synthesis: not all protection is equal, and the question is always specific. Protecting semiconductor manufacturing because adversary nations control the supply is different from protecting shoe manufacturing because competition is uncomfortable. Strategic protection with a defined scope and end-date is different from blanket protection that goes on indefinitely. Subsidies that help domestic industries become competitive are different from tariffs that simply make foreign goods more expensive without improving domestic capability. Thinking clearly about economic nationalism means asking: what specific industry, what specific vulnerability, what specific policy, and what are the measurable costs and benefits?

For Discussion

1. 1.What is economic nationalism? Give an example of an economic nationalist policy.
2. 2.What is the strongest argument for protecting domestic semiconductor manufacturing? What makes semiconductors different from, say, shoes?
3. 3.What happened when the US passed the Smoot-Hawley tariff in 1930? What does this teach about the risks of broad protection?
4. 4.In the 2018 steel tariff story, who benefited and who was hurt? How many steel-using jobs were threatened for every steel job protected?
5. 5.What is the “infant industry” argument? Why might it be compelling for emerging technology industries? What is the main risk?
6. 6.Why does economic nationalism tend to produce retaliation, and why does retaliation make protection more complicated?
7. 7.How would you decide whether a specific industry deserves protection? What criteria would you use?

Practice

The Protection Case-by-Case Analysis

1. 1.Consider three industries: semiconductor manufacturing, steel production, and clothing/apparel manufacturing. For each one, write one paragraph making the strongest case for domestic protection, and one paragraph making the strongest case against.
2. 2.Then make a judgment: which of these three industries, if any, do you think deserves a significant level of domestic protection? Explain your reasoning.
3. 3.Now consider the method of protection: if you decided to protect one of these industries, would you choose a tariff (making imports more expensive), a subsidy (paying domestic producers to compete), or something else? Explain the tradeoffs of each approach.
4. 4.Share your analysis with a parent and discuss whether you agree. Ask your parent which, if any, of these industries they think deserves protection and why.

Memory Questions

1. 1.What is economic nationalism?
2. 2.What is the strongest national security argument for protecting strategic industries?
3. 3.What was Smoot-Hawley, and what happened after it was passed?
4. 4.In the 2018 steel tariff case, roughly how many steel-using industry jobs were threatened for every steel job protected?
5. 5.What is the infant industry argument?
6. 6.What is retaliation in trade policy, and why does it complicate protection?