Trade Protectionism and Inefficient Firm Preservation
Observational StudyReview
High import tariffs and trade barriers insulate domestic manufacturing firms from foreign competition, allowing poorly managed firms to sustain profits and survive without adopting modern operational practices.
Picture this
If a country places a massive tax on imported foreign cars, a local car company can build unreliable, expensive cars and stay in business forever because consumers have no alternative choices.
What the evidence says
Economies with higher trade protectionism display a significantly wider thick tail of low-performing manufacturing firms, as high tariffs protect low-productivity producers from international competitive selection.
- Who was studied
- Cross-country data covering medium manufacturing firms across developing and developed nations.
- How
- Empirical analysis evaluating the correlation between trade openness, import tariff rates, and management score distributions across countries.
What to do
Lower import barriers and non-tariff trade restrictions to foster competitive pressures that encourage firms to upgrade operational practices.
From the source
"Trade protectionism, through high import tariffs, insulates domestic firms from foreign competition, thereby enabling poorly managed domestic firms to remain profitable and stay in business."
Why Do Firms in Developing Countries Have Low Productivity?