Critical Lens
The Free Market Myth: America’s Hidden History of Protectionism
The Big Question Does America practice what it preaches when it comes to free markets and trade? A look at U.S. history reveals some surprising contradictions between rhetoric and reality.
Key Findings At A Glance:
- America relied heavily on protectionist policies during its industrial development
- The U.S. shifted to promoting free trade only after its industries became globally competitive
- Even today, the U.S. maintains significant protections in strategic sectors
- Developing countries may need similar policy tools for their own development
The Evolution of American Protectionism
Phase 1: Building Industrial Might (1870-1913)
- High tariffs on manufactured goods
- Protection of infant industries
- Restrictions on foreign investment
- Focus on building domestic capabilities
Phase 2: Strategic Protection (1956-1992)
- Voluntary export restraints on key products
- Protection of auto industry from Japanese competition
- Support for strategic sectors like electronics and aerospace
- Government procurement favoring domestic firms
Phase 3: New Forms of Protection (1990s-Present)
- Anti-dumping measures
- Technical barriers to trade
- Environmental and labor standards
- Restrictions on outsourcing
Current Protected Sectors
Strategic Industries:
- Airlines (max 49% foreign ownership)
- Broadcasting (max 20% foreign ownership)
- Nuclear facilities
- Defense-related industries
Financial Services:
- Banking restrictions
- Insurance limitations
- Securities regulations
Other Protected Areas:
- Real estate
- Shipping
- Government contracts
- Agricultural land
The Double Standard
What America Preaches:
- Free markets
- Open investment
- Minimal government intervention
- Level playing field
What America Practices:
- Strategic protectionism
- Investment screening
- Industrial policy
- Support for key sectors
Lessons for Developing Countries
Policy Implications:
- Don’t automatically accept free market orthodoxy
- Study historical development paths
- Maintain policy space for strategic intervention
- Design modern industrial policies
- Balance openness with protection of key sectors
Strategic Considerations:
- Identify critical industries
- Build domestic capabilities
- Time market opening carefully
- Use available policy tools
- Learn from others’ experiences
The Way Forward
For Policymakers:
- Study successful development models
- Design appropriate interventions
- Maintain policy flexibility
- Build institutional capacity
For Development Practitioners:
- Look beyond ideology
- Consider country context
- Focus on results
- Learn from history
Key Takeaways
- Free market policies alone didn’t build American industry
- Strategic government intervention played a crucial role
- The U.S. still protects key sectors
- Developing countries need similar policy tools
- Context-specific approaches work better than one-size-fits-all
Academic Abstract:
America now advocates the path of free markets to industrialization. However, a cursory look into its developmental history shows that protectionism has been the hallmark of industrial, investment and trade policies followed in that country. Far from adopting free market regime, it has used the strategic interventions by state to promote American industries, especially knowledge-based ones. Therefore, developing and less developed countries should not neglect the strategic role of the state in development process and completely rely on a regime based on free market forces.
Learn More:
Full citation: Pradhan, Jaya Prakash (2005), ‘Different Shades of American Protectionism’, MPRA Paper No. 16004, University of Munich, Germany.
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