The Case Against Dumb Localization

Cartoon of man riding unicycle down a graph line that is trending precipitously downward.

Congratulations, fellow localizers!  Our arguments are winning!  Why else would the globalization elite be going out of their way to attack us?

The lead editorial of the November 7th issue of the Economist skeptically asks, “Why Is the Idea of Import Substitution Being Revived?”  Import substitution, of course, is a technical term for localization, where local goods and services replace nonlocal ones. Many economists and developing countries embraced import substitution in the 1950s and 1960s, but used it to justify tariffs against imports, subsidies for “infant industries” at home,” and rules against global technology transfer. These policies, the Economist insists, “are doomed to fail. The consumers, competition and technologies that developing economies can only find on global markets are a crucial prerequisite for their industrialization.”

Another jeremiad came from the Organization for Economic Cooperation and Development (OECD), which produced a study showing that increased localization would depress GDP growth worldwide.  The study was then used by two senior economists for the Conference Board of Canada, Julie Ades and Pedro Antunes, to argue: “The COVID-19 pandemic has disrupted product shipments and forced many Canadian businesses to adjust their supply chains.  For some, this has involved sourcing more inputs from local suppliers.  The current economic hardship has also caused a surge of solidarity from Canadians who are supporting businesses by buying locally.  But a strategy focused on buying local is not the solution [for] Canada’s economy needs.”

For its economic model, the OECD assumed that a more localized world required “a global rise in import tariffs to 25%, combined with national value-added subsidies equivalent to 1% of GDP on labour and capital, directed to domestic non-services sectors to mimic rescue subsidies that favour local production.”

Here’s the weird thing.  I agree with most of these arguments.  No economist should be surprised when higher tariffs and more subsidies depress an economy.  But all these policies are part of an import-substitution strategy I would call dumb localization.  It has nothing to do with what most of today’s advocates of localization are promoting.

Smart localization is premised on free markets and an open trade policy.  Its activities include the following:

  • Consumers and businesses should become better shoppers and freely choose great local options they previously overlooked;
  • Local businesses should strategically substitute for imported inputs with innovative expansions (which is exactly how the great economist Jane Jacobs described the growth of the world’s most successful regions);
  • Governments should remove the vast majority of subsidies that go to global business and harm local small businesses;
  • Policymakers should modernize antitrust rules so that monopolists like Amazon can no longer distort markets and squelch local competition; and
  • Trade negotiators should overhaul existing agreements so that the current disadvantages against local business (like efforts to hide the origins of goods and confuse discriminating consumers) are removed.

In other words, the globalizers have it exactly backwards.  They are the ones who wish to wreck free markets with massive subsidies, monopolies, and trade distortions.  And we must continue to challenge and defeat these destructive policies.

Almost all studies of the impacts of smart localization policies, in contrast, find that they increase income, wealth, and jobs.  When a region shifts its spending from imports to competitive local goods and services, the “economic multiplier” is pumped up—and everyone in the region benefits.

The strongest local economy is one that is as self-reliant as possible and maximizes its exports. Some imports are necessary, but every unnecessary import is a drag on the local economy.

Which brings us to a fundamental misunderstanding about localization.  Globalizers assume that a community wishes to seal itself off from the world.  Nonsense.  A strong local economy wants to engage with the global economy, but from a position of strength.  Globalizers encourage communities to become dangerously dependent on the importation of many goods and services they could easily make for themselves, and thereby undermine the resilience needed to ward off the next pandemic like COVID-19. 

What would happen, many ask, if every community in the world localized in this way?  Wouldn’t a world of more localized communities have less trade and then make everyone poorer?  Not at all.  The global economy is not a zero-sum game, and smart localization should be considered an act of increased efficiency.  And if every community became more efficient, the world would become more efficient and wealthier.  Ironically, a world of wealthier, more localized communities might experience more trade—it would just be trade in more exotic goods and services most communities could not cost-effectively make for themselves.

Let me give a simple example from my own life.  Twenty years ago, my then spouse and I moved our mortgage from Bank of America to a local credit union.  That act of localization saved us money, and with some of the savings I spent more on my favorite import—single malt scotch whiskey.  By localizing my banking, I had more money to expand the world’s whiskey trade.

The paradox of worldwide localization is that it could actually increase trade—but trade would be more focused on things that communities could not cost-effectively provide for themselves.  What communities can provide cost effectively for themselves are most services and most commodities (like soybeans) that weigh a lot and have a low dollar value per unit weight (and therefore vulnerable to rising shipping costs).   

So, no, Economist editorialists, we won’t abandon smart import substitution policies.  And, no, OECD analysts, we don’t believe your studies that knock down ridiculous strawmen of dumb localization.  And no, Conference Board of Canada, your economists really don’t have a clue about the value of local purchasing and why a growing number of Canadian businesses and politicians are embracing it.

4 thoughts on “The Case Against Dumb Localization”

  1. This sounds to my poorly educated ear like a return to trade as it was before the invention of capitalism. Wasn’t that called “mercantile trade”? My impression is that there were exchanges of goods, but these exchanges were in general mutually beneficial to all the parties–traders and their countries alike. The new international trade agreements clearly embody the premise that the “traders”–manifestly not any countries–get to make all the money regardless of what goods are involved or where they are going or how they are produced, and the countries are wholly subservient to that rule.

  2. Patrick, thanks for your very thoughtful contribution. And on many points, I’m in complete agreement. I love the Keynes quote. And I share your concern that pernicious global forces sometimes require trade walls. As even David Ricardo noted, a world in which capital freely moves but labor doesn’t–which we seem to be moving toward–can lead to intolerable “absolute advantages” enjoyed by countries that treat their labor forces most abysmally.

    I think it’s useful to separate the issues of trade policy from subsidies.

    On trade policy, I embrace the position of many of our friends, like Waldon Bello, to create global standards for the environment, labor, and community, and to allow punishment by tariffs and other measures against violators. Today’s trade agreements, which largely create ceilings for standards rather than floors, are completely counterproductive. I’m skeptical whether one nation can get very far protecting itself from bad actors (like China) through the unilateral imposition of trade walls. It’s a defensible position, but chances our good that you will wind up punishing your own industries more than those of the offending countries.

    On subsidies, we have deeper differences. I’m with Jane Jacobs on this one. Creating “monstrous hybrids” between the commercial and guardian sectors is an invitation to corruption. This is my problem with most economic development “incentives” — it’s essentially a form of legalized bribery that rarely does the economy any good. Even when the mission of such subsidies, such as preventing climate disruption, is admirable, the result is too often a Solyndra fiasco, which ripped off US taxpayers $500 million and generated no useful solar technology. There’s a role for public investment in public goods, but goods and services that efficiently can be produced by the private sector do not quality.

  3. Look, though your articles are always very compelling, this one reminded me that there are some very interesting differences with your framing.

    What’s refreshing is ‘smart localization’ as a concept. There are plenty of dumb protective tariffs, and Donald Trump exemplified these with his paleocon isolationism. Your critiques there are welcome.

    But more generally, an inward-oriented economic strategy stressing a balanced economy has merits – especially in a time of climate catastrophe where shipping and air traffic are on the agenda – that you aren’t yet stressing, are you. Nor are you looking at most of the world where currency fluctuations and zany commodity price volatility are vital reasons for a more inward-oriented perspective.

    The key question is whether economies-of-scale that allowed massive Chinese production to deindustrialize most of the clothing, textile, footwear, appliance and electronic manufacturing in countries like South Africa and Zimbabwe (which I know best) can justify (with lower prices for consumers) the appalling imbalances and inequalities that inexorably follow from more openness to world trade. The exceptional power of the WTO and bilateral trade agreements to ruin local economic development initiatives is another reason to stay clear of the commercial circuits of capital.

    You may think this is just dependencia theory rehashed (and indeed in the U.S. journal New Politics two Brazilian colleagues and I have an article making this case, as we apply it to the BRICS countries).

    But if that tradition doesn’t appeal to you, why not give a look in to John Maynard Keynes’ ideas about economic sovereignty, from his 1933 article in the Yale Review: “I sympathis with those who would minimize, rather than with those who would maximise, economic entanglement among nations. Ideas, knowledge, science, hospitality, travel–these are the things which should of their nature be international. But let good be homespun whenever it is reasonably and conveniently possible and, above all, let finance be primarily national.”

    Because this 1933 quote (from the attached article) was taken up by Prebisch and the Latin American dependency school, as the basis for smart national-scale import-substitution industrialisation, which worked very well comparatively, until the 1970s when luxury-goods overaccumulation and the general problem of global stagflation undid the model, maybe you’re interested in the lineage of arguments. Our leading African ‘delinking’ advocate was Samir Amin; and at IPS you might have run into Walden Bello, who is still working very hard to promote this way of thinking.

    Anyhow, just thought I’d send a little feedback on why a different and hopefully not dumb localization agenda might be worth your exploring, too, especially because of the need around the world to address climate crisis, the need for internal economic balance (and backward-forward linkages), and the need most countries have in the era of renewed debt crisis to better husband their foreign exchange instead of using it for (often unnecessary) imports.

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Michael H Shuman