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Developing countries often implement protectionist trade policies in the form of tariff and non-tariff barriers as an economic development strategy. This stems from a misguided belief that a good way for countries to foster globally competitive firms is by insulating nascent industries from foreign competition.
But a working paper from University College Dublin puts the lie to that notion. The authors studied 13 Latin American countries that had protectionist policies in place in 2005, and they found no evidence of increased innovation in either products or processes—in fact, there was a negative impact.
Protectionist trade policies (as opposed to policies that fight foreign protectionism) limit innovation for two main reasons. First, countries that implement protectionist policies are left out of global value chains, because it becomes more expensive to trade in intermediate goods. Second, firms face higher innovation costs, either because imported inputs get more expensive or because they are left with domestic inputs that are lower-quality.