small businesses and farmers
The promise: why tariffs are tempting for developing countries Tariffs are an obvious lever for governments trying to jump-start manufacturing or protect strategic sectors: They raise the price of competing imports, giving local firms breathing room to grow, invest, learn, and absorb new technologieRead more
The promise: why tariffs are tempting for developing countries
Tariffs are an obvious lever for governments trying to jump-start manufacturing or protect strategic sectors:
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They raise the price of competing imports, giving local firms breathing room to grow, invest, learn, and absorb new technologies (the classic “infant-industry” argument). Policymakers like tariffs because they’re politically visible and act fast.
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When paired with smart export promotion and learning policies, tariffs can be part of a sequence that helps firms become competitive on the global stage (some East Asian economies used protective measures early while pushing firms toward exports).
So: tariffs can create the space for industrial development — but only if everything else lines up.
The risks: how tariffs can trap a country into long-term isolation
The historical record and modern analysis warn of numerous failure modes:
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Chronic protection → low productivity and complacency. If protection becomes permanent, firms stop innovating because they can survive behind a tariff wall. That creates inefficient industries that never scale internationally. Many accounts of import-substitution in Latin America document this pattern.
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Rent-seeking and political capture. Tariffs create clear winners — and lobbying pressure to keep protection in place even when it hurts the broader economy. That’s a political economy trap that turns temporary help into permanent privilege.
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Higher consumer prices and inequality. Tariffs are effectively a tax on imported goods; consumers — often lower-income households for whom imported essentials are a bigger share of spending — pay the bill. That can worsen poverty and political backlashes.
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Trade diversion and retaliation. Other countries can retaliate or shift trade patterns, which reduces market access for exporters and can shrink the size of markets domestic firms rely on. Over time that weakens integration into global value chains.
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Legal and reputational costs at the WTO and with partners. WTO disciplines allow some flexibility for developing countries, but persistent, broad protection can trigger disputes or reduce the willingness of investors to engage.
A real-world illustration: many Latin American ISI experiments created protected domestic industries but delivered slow productivity growth, corruption, and a failure to integrate into competitive export markets — the very outcomes policymakers were trying to avoid.
What distinguishes successful from failing tariff strategies?
Look for a combination of policy design features:
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Temporary & time-bound protection. Protection should have a clear exit and be conditional on performance (e.g., productivity gains, export targets, cost reductions). Permanent tariffs usually signal failure.
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Targeted, narrow scope. Protect specific activities that have credible learning spillovers (e.g., complex manufacturing stages) rather than blanket tariffs across the economy. Broad, uniform tariffs encourage rent-seeking.
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Complementary policies. Tariffs alone don’t make firms globally competitive. They must be paired with industrial credit, skills training, R&D support, good infrastructure, competition policy and export incentives. East Asian successes combined protection with export discipline and government capacity to pick and prune industries.
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Clear performance metrics and sunset clauses. Tie protection to measurable outcomes (unit costs, product quality, export market share) and remove it automatically if goals are unmet. That reduces regulatory capture.
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Open to trade and FDI where it matters. Even when protecting a sector, keep links to foreign suppliers, technology licensing, and export markets. Openness to investment and knowledge flows prevents isolation.
Practical alternatives and complements to tariffs
If the aim is industrial growth, countries should consider a menu that includes — but is not limited to — modest, well-designed tariffs:
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Active industrial policy tools: targeted subsidies, public procurement preferences, matched R&D grants, clusters/industrial parks, and export credit. These can be more transparent and conditional than tariffs.
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Trade facilitation & regulatory reform: cut costs for exporters (ports, customs, standards), so firms can reach global markets faster.
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Skills and infrastructure investment: human capital and power/transport often matter more for competitiveness than tariffs.
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Smart tariff design: temporary tariffs on intermediate goods only when there’s a clear domestic value-added strategy — and with exceptions for inputs that domestic producers can’t source.
Governance checklist — questions policymakers should ask before imposing tariffs
(If you can’t answer “yes” to most of these, don’t go broad with tariffs.)
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Do we have an explicit, time-bound plan (with milestones) for the industry?
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Are the protections conditional on measurable productivity or export targets?
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Do we have institutions that can enforce sunset clauses and prevent capture?
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Are we maintaining openness in ways that keep technology and investment flowing?
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Have we modeled the distributional costs (who pays) and have a mitigation plan for poor households?
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How will partners or global value-chain buyers react — could we lose critical market access?
Bottom line — a human take
Tariffs are neither a silver bullet nor an automatic trap. They are a blunt instrument that can help buy time for learning if used sparingly, temporarily, and within a broader industrial strategy that pushes firms toward export competitiveness and innovation. But if tariffs are broad, permanent, or unaccompanied by investment in skills, competition, and market discipline, they tend to produce the opposite of what leaders want: stagnation, higher prices, and political capture that isolates the country.
If you’re advising a government, don’t treat tariffs as the first lever — treat them as one temporary tool inside a tightly governed industrial policy playbook. The good news is that modern policy design (and the recent revival of evidence-based industrial policy) gives developing countries smarter options than the blunt ISI experiments of the past — but only if political leaders commit to transparency, metrics, and a sunset.
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The level playing field Tariffs don't hit evenly. They can appear to be a harmless tax on imports, but in reality, who you are — a small shopkeeper, a farmer, or an international corporation — will decide whether tariffs become a suffocating weight or merely another entry on a strategy budget. For lRead more
The level playing field
Tariffs don’t hit evenly. They can appear to be a harmless tax on imports, but in reality, who you are — a small shopkeeper, a farmer, or an international corporation — will decide whether tariffs become a suffocating weight or merely another entry on a strategy budget.
For large companies, tariffs are often a problem they can handle. For farmers and small businesses, tariffs tend to be a storm they cannot weather.
1. The cost to small businesses
Increased cost of inputs, fewer buffer
Small businesses tend to buy raw materials, components, or finished products in smaller quantities. When tariffs increase the cost of such imports, small businesses cannot always obtain rebates or easily change suppliers.
In contrast to big companies, they lack treasury staff and global supplier networks. That leaves tariffs directly squeezing margins — and occasionally forcing price increases customers resist.
Paperwork and red tape
Tariffs impose burdens of compliance: paperwork, customs clearance, and codes of classification. For a large multinational, that is managed by legal and logistics functions. For a small company, the owner may be doing the accounting at midnight, so trade bureaucracy is a significant hidden expense.
Survival vs. strategy
Lots of small businesses operate on wafer-thin margins. Even a small tariff shock can determine if a café ordering specialty coffee beans keeps going, or if a craft producer who depends on imported steel goes under.
While giants can afford to take losses for the sake of long-term strategy — their survival timescale often being years or even decades — they can’t.
2. The special squeeze for farmers
Farmers, particularly in emerging economies, exist at the interface of trade policy.
When they purchase inputs
Seeds, fertilizer, feed, and machinery tend to be imported. Tariffs on inputs translate into increased costs at planting time, with no guarantee of improved selling prices at harvest.
Small farmers have less negotiating power and less credit availability to absorb those spikes.
When they sell crops
If another nation strikes back with tariffs on their exports, farmers are directly impacted. For instance, during the U.S.–China trade war, American soybean farmers lost billions when China put retaliatory tariffs on their products, resulting in oversupply and crashing prices at home. Large agribusinesses might hedge or switch markets — but small to mid-size family farms suffered.
Market volatility
Agriculture is already unpredictable with weather and bugs. Throw in trade wars, and small farmers have yet another risk they cannot control. A large agribusiness may diversify internationally; a farmer bound to a local co-op has no one else to sell to.
3. How large corporations manage better
Diversification
Large firms diversify by nations. If one export market imposes tariffs, they switch to another. If one supplier becomes expensive, they have five others in trouble.
Economies of scale
Large operators can buffer tariff expense, negotiate with suppliers, or mechanize operations to lower unit cost. They may even transmit some of the tariff expense to smaller suppliers — solidifying their grip.
Political leverage
Large companies influence governments, set terms for trade negotiations, or even get exemptions. Small farmers and businesses hardly enjoy the same access or clout.
4. The ripple effect on communities
When small businesses and farms get hurt by tariffs, the hurt spreads quickly. Local economies established on family farms and small shops can crumble, causing job losses and rural vitality in decline.
Meanwhile, large corporations tend to recover more quickly, displacing smaller competitors in the process — which threatens further industry consolidation (fewer, larger competitors controlling markets).
5. The human factor — resilience and inventiveness
Bottom line
Tariffs don’t fall evenly.
Policymakers tend to market tariffs as a means of “protecting domestic industries,” but in the absence of support schemes (credit lines, adjustment aid, cooperative arrangements, or exemptions for critical farm inputs), the very people they intend to shield — rural communities, family farms, and small shops — can end up bearing the brunt.
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