One of the underexamined aspects of the United States’ recent turn toward protectionism is the likely loss of competitiveness and productivity.
While protectionism is a core aspect of populist economics—see import substitution and Latin American economics—protectionist policies ultimately undermine productivity and long-term growth.
That’s because less competition results in an inefficient allocation of labor, less efficient outcomes and a reallocation of scarce capital away from its most productive uses, which in turn leads to unimpressive returns on investment.
While protectionist policies sometimes produce short-term economic gains, over time they almost always lead to a combination of stagnation, stagflation, resource misallocation and supply chain distortions.
This dynamic makes the shift toward protectionism all the more ill-timed given the monumental investment into artificial intelligence and how it will drive innovation and productivity into the next generation.
Just as the U.S. appeared to be turning the corner on productivity after a weak three-decade run, the descent into protectionism poses a threat to the primary driver of long-term growth and rising living standards.
Innovation generated domestically by an increase in productivity will simply overwhelm both the intended and unintended consequences of economic populist policies that are being put in place.
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But that seems a bit ingenuine given the challenges from DeepSeek and the way in which ideas permeate fungible national borders.
Given the elevated risks of a near-term recession following the first quarter gross domestic product report on Wednesday, the wise policymaker might want to initiate a forceful discussion of the long-term consequences of protectionist policies.
One thing that is certain is that in the short run, productivity means little.
In the long run, it’s everything.
