This is called the "infant industry" argument, and it has been made since at least the 16th Century, most famously by Antonio Serra, a proto-mercantilist.
This idea of raising tarrifs on imports and then using the money to protect domestic industries has been tried in Latin America in the 60s and 70s, in Africa, and in many places.
The results are mixed.
The problem with infant industry is that you get a group of local monopolies protected by the government who sell expensive low quality goods to the public, people get sick of it, they want the lower priced better foreign goods as it will increase their quality of life, and at some point there is sufficient political pressure to force a regime change.
Another way of saying this is that the infant industries often fail to grow up, they remain protected infants forever.
On the other hand, if you don't protect your infant industries, then you have no chance against mature foreign competitors, as you point out.
Then there is a third aspect to this, which is that foreign governments, especially East Asian governments (not only China, but China is the biggest offender) massively subsidize domestic industries and so you have to subsidize and protect your industries in return, or they will be destroyed by competitors who never need to turn a profit, or repay a loan, or meet any environmental regulations, or deal with unions, etc.
So it's a tough call. All these theories have valid points, but they all have fatal flaws. For the last few years, I've come around to the following mantra, which is my own development philosophy:
* every country should have a long run balance of payments. That means all trade should be balanced.
* countries should make investments in local productive capacity, but not subsidize industries per se
* countries should not allow foreign companies to set up factories or purchase capital or land. Each nation's assets should be owned by their own citizens only.
* With the above caveats, there should be free trade and no industry protection.
What this means, in practice, is banning foreign capital inflows. Have your own currency, borrow only in your own currency from your own people, and don't allow foreigners to purchase your bonds, stocks, land, private debt, or productive capital.
But trade all you want with them. As long as you do that, your currency will depreciate sufficiently to prevent any flood of cheap imports, and your domestic industries will have a chance.
Even if we assume that protectionism is good in this case, there is actually a flaw in how they enact that protectionism. Ceasing trade with Switzerland can hurt farmers if the domestic industry doesn't grow fast enough. At the same time the entire idea behind ceasing trade with Switzerland is being based on the idea that your are cutting off supply to a competitor. Similar to cutting off oil exports to a nation you are at war with. If Switzerland can find a different country to import cocoa from, this could backfire spectacularly. The real answer would have been to ban imports of processed goods like chocolate. That way you won't get into this weird situation where your country is flooded with cocoa and chocolate that fails to compete against Swiss chocolate.
I tend to agree. The issue with capital or land is that you are taking another country's tender that may be debased in exchange for capital/land that your own citizens are priced out of (due to other countries running the printing press).
This is why it is prudent to lock up certain assets (land / long lived assets) to citizens of the country.
This is where china succeeded. You go in, you give up IP and share %, and they get a piece of the action.
Free trade benefits everyone for pennies. However, the makers / artisans (shoemakers, etc) always lose out big. So free trade is a net winner but creates very unbalanced losers. Ultimately there is an argument for compassion against free trade, which fits squarely with your arguments.
Yup. 40% of US corporate equity is owned by the foreign sector. We have sold off almost half our capital stock to foreigners in exchange for short run corporate profits and cheap foreign goods.
And any attempts to adopt a more nationalistic trade policy that promotes sovereignty are met with pretty brutal suppression from our internationalized corporate sector and their various handmaidens in the press and progressive politics -- which now has no loyalty to America at all.
And this is happening all over the world, but most prominently in the US as well as Southern Europe. Domestic political forces that hate the native population are collaborating with the domestic corporate sector to sell every piece of capital that isn't bolted down to overseas investors with cheap printing presses and a longer time horizon.
> Curious, why? Countries vary in size, so this seems like an arbitrary restriction.
It is not an arbitrary restriction at all, it is the only possible way to have balanced trade in a hostile environment. You have the balance of trade identity:
change in current_account + change in capital_account = 0
That means in order for nation A to be a net importer of goods, it must sell off its capital to the foreign sector.
So instead of thinking "Lazy Americans love cheap foreign goods, so they import too much and that makes them poorer so they have to sell off their capital to "borrow" from abroad"
Think like this: Nation B prints up money, uses it to buy bonds/factories/etc in nation A, which forces the currencies to adjust so that Nation A's products are more expensive to nation B and Nation B's products are cheaper to Nation A so that enough is imported to balance the current and capital account, and in this way Nation B's intervention makes Nation A poorer.
Then the question becomes, why should Nation A allow this type of intervention?
Indeed, the impoverishment of Ireland was due mostly to British landlords who owned a huge portion of Irish land, and British firms that owned a huge portion of Irish industry, making the Irish mere renters of their own country's capital.
> Also: how is it undesirable to have a foreign company build a factory that hires workers?
You do not need foreigners to do that. For a foreigner to build a factory in nation A, they have to first export some good to nation A, and instead of using the proceeds to importing an equivalent amount of goods, they use the proceeds to buy some land or a factory, etc. That land or factory could have been bought by someone in nation A if they would not have been deprived of the export income.
In other words, in a floating currency regime, it is impossible for the foreign sector to "bring money in" to another country and fund investment - trade is not funded with specie flows - it is only possible for the foreign sector to drain income from nation A's current account, and then re-invest the income that was drained via the capital account. Thus all foreign investments are merely efforts to recycle trade surpluses, and they are required for the trade surpluses to occur in the first place.
That is what is wrong with foreign capital inflows, and why all nations from South Korea to China that follow export-led growth plans always heavily restrict or outright ban foreign capital inflows, much to the consternation of economists who think foreign capital inflows help rather than hurt. Asia knows that these inflows hurt, and it's time we realized that, too.
This idea of raising tarrifs on imports and then using the money to protect domestic industries has been tried in Latin America in the 60s and 70s, in Africa, and in many places.
The results are mixed.
The problem with infant industry is that you get a group of local monopolies protected by the government who sell expensive low quality goods to the public, people get sick of it, they want the lower priced better foreign goods as it will increase their quality of life, and at some point there is sufficient political pressure to force a regime change.
Another way of saying this is that the infant industries often fail to grow up, they remain protected infants forever.
On the other hand, if you don't protect your infant industries, then you have no chance against mature foreign competitors, as you point out.
Then there is a third aspect to this, which is that foreign governments, especially East Asian governments (not only China, but China is the biggest offender) massively subsidize domestic industries and so you have to subsidize and protect your industries in return, or they will be destroyed by competitors who never need to turn a profit, or repay a loan, or meet any environmental regulations, or deal with unions, etc.
So it's a tough call. All these theories have valid points, but they all have fatal flaws. For the last few years, I've come around to the following mantra, which is my own development philosophy:
* every country should have a long run balance of payments. That means all trade should be balanced.
* countries should make investments in local productive capacity, but not subsidize industries per se
* countries should not allow foreign companies to set up factories or purchase capital or land. Each nation's assets should be owned by their own citizens only.
* With the above caveats, there should be free trade and no industry protection.
What this means, in practice, is banning foreign capital inflows. Have your own currency, borrow only in your own currency from your own people, and don't allow foreigners to purchase your bonds, stocks, land, private debt, or productive capital.
But trade all you want with them. As long as you do that, your currency will depreciate sufficiently to prevent any flood of cheap imports, and your domestic industries will have a chance.