Economic Nationalism: Bounty or Bust?

by Brian Dunning
January 7, 2025

Skeptoid's wheelhouse is science vs. pseudoscience, so some of you might be asking why are we talking about an issue of political policy? We're not. We're talking about a question rooted in science: economics. Economics is very much a science, though there's always debate on whether it's a hard science or a soft science. It's generally considered a soft science, because it studies human behavior and societal interactions, which are harder to quantify and control compared to, for example, chemistry. Some argue that economics should still be considered a hard science due to its heavy dependence on mathematics, including calculus, statistics, probability, game theory, differential equations, and so on. However, these remain difficult to apply; you can mathematically develop all the predictive theories you want, but they're really hard to test by observing human behavior. And so today we are going to look at some hard examples of economic nationalism having been tried in three famous recent cases. Was it a bounty for their economies, or a bust?

The basic principle of economic nationalism compared to free market economics is that you voluntarily restrict yourself to only a domestic supply chain rather than to all international markets. Rather than allowing domestic companies the freedom to buy low and sell high wherever they can find the best deals and create maximum value, the doctrine of economic nationalism dictates that they buy domestically only — which is unlikely to ever provide the best value.

In a nutshell, almost zero economists find the basic tools of economic nationalism — broad tariffs, import quotas, and the desire for economic self-sufficiency — to be wise economic strategies. In almost every case when they've been tried, they've resulted in substantially more self-harm than good. Yet today, many nations around the world are pursuing economic nationalism, not because of sound economic theory, but because of the rising tide of global populism. Populism is the focus on ideas that are popular, regardless of how sound they may or may not be. Populists are typically ordinary people who see experts and officials as elitists who are out of touch with their needs; and populist leaders are typically those who take advantage of this, framing themselves as fighting the elitists on behalf of the people. If an idea becomes popular among ordinary people, like curbing immigration, populist leaders will often promise to do it, whether it's a good idea or not. One idea with populist roots is that of the tariff, a key tool of economic nationalism; so let's take a moment to examine those.

Tariffs do have their use. Most nations employ modest tariffs to some degree. Tariffs can balance trade deficits, stabilize international markets, and protect domestic industries and job security. However, those are normal tariffs. The tariffs favored by economic nationalists go far beyond that; they're typically much higher and applied in a form of economic warfare against competitors, or in retaliation for the same — generally wreaking havoc on trade balances and market stability.

The idea behind a tariff is to make it too expensive for domestic companies to buy from foreign suppliers, thus forcing them to buy domestically. If a foreign country wants to sell you an import for $100 and your government imposes a 50% tariff on it, then you end up paying $150: $100 to the foreign seller, and $50 to the government. Tariffs do three basic things: they are often effective at slowing foreign competition; they enrich your government at your expense; and they make it much harder for your industry to keep costs down. This drives up the prices of domestic goods, and you end up with inflation. To counter this inflation, interest rates are usually raised to slow the economic activity. So, high prices, high interest rates. These downsides to tariffs are why most nations consider them a last resort, usually reserved to defend against intense unfair foreign competition — for example, during the 1970s and 1980s when Japanese automakers and electronics companies dumped their products on the US markets at below their own cost, in an effort to kill off American manufacturers.

So if these kinds of tariffs end up having more harmful domestic economic consequences than positive, why are they such an easy sell to populists? Why do some people irrationally cheer a policy that will probably leave them worse off? The answer comes from behavioral economics, the most fundamental principle of which is that people would rather feel they've "won" even if it costs them, than feel they've "lost" even if they come out ahead. This is precisely why tariffs are often presented in "us vs. them" terms: Sell people the idea they're "winning" by imposing tariffs against a foreign competitor, and they'll cheer without even noticing their own higher prices and interest rates.

That brings us to the meat of this episode. Here are three examples of countries that implemented economic nationalism in recent years and suffered harmful internal economic consequences as a direct result:

1. Venezuela

When the populist Hugo Chavez rose to power, he did so under a policy called Bolivarianism, named for Simón Bolívar, the hero of Venezuelan independence. Chavez's platform was largely one of independence from American and Western influence, whom he blamed for all of Venezuela's problems. His imposition of economic nationalism, which he named the Bolivarian Revolution, has been continued under his successor Nicolás Maduro.

Venezuela nationalized their oil industry, and redistributed its profits toward the nation's vast lower classes through subsidies, housing, and other social programs, intent on keeping their profits in Venezuela. Chavez replaced experienced experts throughout government, and in particular the oil industry executives, with political appointees to carry out his plans.

The negative impacts Venezuela suffered from all this became legendary and is impossible to summarize here, but it started when foreign capital and investment mostly fled the country, fearing the market unpredictability. Mismanagement of the national oil company by Chavez's cronies caused production to plummet, leaving Chavez's domestic plans without funding. Without foreign imports, the prices on domestic goods soared, discouraging production; and left Venezuelans with widespread shortages of essential goods. Domestic industries collapsed under the protectionist policies. Chavez printed new money furiously to try and pay for all of this, which caused hyperinflation. Penniless and literally starving, an estimated 8 million Venezuelans — a quarter of the population — have so far fled the country.

These policies were put into practice not because the country needed them; they didn't. Economists have written whole books on how flawed these policies were to begin with. Chavez did it largely to consolidate his own political power by constructing an anti-imperialist narrative, mainly casting the United States as the villain, and rallying the people into a fervor of anti-foreigner passion and to reassert Latin American sovereignty.

2. Brexit

Perhaps the most famous case of populist-driven economic nationalism in recent years is Brexit, the United Kingdom's withdrawal from the European Union in 2020. For 27 years, the UK's membership in the EU provided seamless access to the entire European market. Exports were tariff-free, trade was streamlined. There were no customs duties or controls between nations, trucks could just deliver the goods from one nation to another. If you wanted to do business, there was no easier and more profitable way. Democratic values and the rule of law are upheld within the EU, and the standard of living is higher from shared consumer protection, healthcare, and environmental standards. Economically, membership in the EU is a no-brainer.

But membership also provides for unrestricted access to live, work, and study in any member nation; and the UK is a pretty attractive place to live. By the time of the referendum in 2016, over half a million non-citizens were immigrating to the UK each year. Some British populists saw them as lawless, unwilling to adopt British culture, and a drain on national resources. Many wanted stronger borders. Also many Britons felt the UK contributed too much to the EU without other nations ponying up their fair share. Many saw EU officials as elitists who were out of touch with ordinary British people. Overall, the voters who passed Brexit saw it as an issue of reclaiming control over their own laws, finances, and borders — leaving the EU was the ultimate act of nationalism.

The UK did indeed regain control over their ability to negotiate trade independently and to establish their own immigration rules. They did so. The result was that sectors like agriculture, hospitality, and healthcare suddenly faced severe labor shortages. Britons wishing to travel internationally found it difficult and complicated. Small businesses faced enormous new paperwork and customs delays. Many had to give up doing business internationally, whether they were trying to import or export. Processes that used to be seamless became unmanageable. Even here at Skeptoid, for several years we were forced to stop shipping USB drives and store merchandise to our members in the UK. To comply, we would have had to set up a VAT account with the UK government and file quarterly returns which were far too burdensome and expensive for our small team.

The result was predictable. Soon after the referendum, polls have indicated that a growing majority of Britons feel leaving was the wrong choice; and today, a plurality think they should rejoin, with just under 50% favoring rejoining and around 35% favoring staying out. If they do rejoin, Brexit will have proven to be history's most wasteful experiment in populism-driven nationalism. Economists estimate that by 2035, the UK will have 3 million fewer jobs, 32% lower investment, 5% lower exports, 16% lower imports, and be £311 billion worse off than if they had remained in the EU.

3. India

Less well known to Americans is what India has been up to internally in the past decade. With an initial goal of basically just boosting domestic production, India began introducing economic nationalism in the early 2010s. They rallied the people with slogans such as "Make in India" and "Self-reliant India" which resonates well with people who wrongly equate fewer imports with more domestic jobs.

India withdrew from a major Asian trade pact and other trade agreements, and imposed steep tariffs across numerous categories, everything from consumer electronics to car parts to textiles to toys and even medical devices. They created requirements for manufacturers to source materials domestically. This was also sold to the public by framing the high trade barriers as a matter of national security: having local supply chains would provide strategic autonomy in the event of some world crisis.

It has not gone well. A large part of the tariff strategy was to encourage foreign companies to build factories inside India, but with all the protectionist policies and policy reversals, foreign companies have been mostly gun shy and have been staying away. Indian manufacturing depends a lot on imported components, so as manufacturing costs have risen because of the tariffs, those higher costs have been passed on to Indian consumers. Quality of products has gone down in many cases, as manufacturers have had to turn to cheaper sources.

India implemented these nationalist policies but largely failed to make the domestic investments that would have been needed to help Indian companies and workers be more competitive; investments such as infrastructure, skill building, and research and development. As a result, India's goal of having manufacturing make up 25% of their gross domestic product was missed widely. Instead it actually fell, and hovers around 16% today.

From these three examples, we can learn at least one valuable lesson. If any country's leaders are pitching economic nationalism as the path forward when they're not already in a major economic crisis with no other options, their lawmakers would be well advised to ask the advice of economists or historians, if they wish to learn whether their plans are grounded in some source other than data and economic theory — because that's the only place they should be.

By Brian Dunning
Follow @BrianDunning