The Intellectual Origins of Trump’s Economic Policies

However, poorly conceived British responses to the U.S. policy eventually resulted in a unified American posture in support of that Hamiltonian version of ISI. Although the leaders of the new nation eventually came to support the need for tariffs to nurture the nascent manufacturing sector, the level of those tariffs and the role of subsidies for industrial sectors remained a point of contention. The dispute gained sectional importance, with the policy benefiting the rapidly industrializing North more than the more agrarian South. Some historians argue that the early national dispute over ISI—winners and losers, level of tariffs, the role of subsidies—planted the seeds for the Civil War.

More recently, many emerging market economies, particularly in Latin America, have adopted ISI policies. Raúl Prebisch is the name most associated with the reemergence of ISI in that region. Prebisch was the governor of the Central Bank of Argentina and became the executive director of the Economic Commission for Latin America in 1950. In that position, Prebisch observed that Latin American economies depended on exports of low value-added raw materials and commodities to the United States and Europe, resulting in greater wealth accumulation in the “developed center” versus the “developing periphery.” In the 1960s Prebisch became the founding secretary-general of the UN Commission on Trade and Development. In his various policy positions, he supported industrialization of the Global South. Many Latin American countries, following their understanding of the Prebisch model, adopted ISI policies. Interestingly, Prebisch himself criticized a simplistic application of ISI and supported free trade among those peripheral economies with protectionism between them and the Global North.

During the 1960s, many Latin American countries borrowed heavily to finance industrialization and its necessary infrastructure. Ultimately, the Latin American experience of ISI failed when the oil shock of the late 1970s created both inflationary pressures and a global recession. Heavily indebted Latin American nations defaulted on their debt, causing the “lost decade” in Latin America in the 1980s and 1990s. Those events also triggered a severe U.S. banking crisis, necessitating policy intervention. The perceived costs associated with ISI hastened the worldwide consensus that global free trade would make the world’s economy more prosperous and stable. The World Trade Organization became the institutional home for that new consensus.

The implications of that history of ISI for the Trump administration’s policy initiative are threefold. First, as in the debate Hamilton’s policies engendered, the policy will certainly create winners and losers. In Hamilton’s day, the loser was clearly seen as the nation’s agrarian sector, which at the time was relatively large and politically important. Given how much the U.S. economy has come to rely on cheap imported manufactured goods, the losers will be more broadly distributed among the millions who directly or indirectly benefit from such goods, if (as most experts think) the tariffs cause import prices to increase. Second, subsidies for domestic industries are generally controversial. Although the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act had bipartisan support in Congress when it was signed into law in August 2022, Trump and Speaker of the House Mike Johnson have recently questioned the wisdom and efficacy of such a policy. Third, as the Latin American experience has shown, borrowing from international creditors to support capital investment contains risks. The United States is not as vulnerable as the Latin American nations in the 1970s and 1980s; however, the question of whether the U.S. ratio of debt to gross domestic product (GDP) will prove problematic is hotly debated. Finally, no nation of the United States’ scale and global importance has ever adopted an ISI policy regime. Many economists fear that the United States’ adoption of such a policy would throw its major trading partners into recession and slow global growth overall.

The Trump administration’s tariff announcements revive import substitution industrialization in order to protect domestic industries and stimulate growth—but the policy poses significant risks. Historical and global experiences with ISI highlight the complexities and potential pitfalls of such economic strategies. Given the leading role of the U.S. economy and the importance of the other countries impacted by this latest version of ISI, the price of a policy mistake could be high and broadly felt throughout the global economy.

Roger W. Ferguson Jr. is the Steven A. Tananbaum Distinguished Fellow for International Economics at CFR. This article is published courtesy of the Council on Foreign Relations (CFR).