In import-substitution industrialization, which policy instrument is commonly used to protect domestic capacity?

• A. Export subsidies are never used in ISI.
• B. Deregulation is the primary tool in ISI.
• C. Tariffs are commonly used to protect domestic capacity.
• D. Free trade agreements are the main instrument in ISI.

Answer: (C)

In import-substitution industrialization, the main goal is to build up domestic production by shielding local industries from foreign competition. A primary tool to do this is imposing tariffs on imports. Tariffs raise the price of foreign goods, making domestically produced goods more competitive in price and encouraging investment in local industries. This protection helps infant industries grow, gain scale, and become efficient before they have to compete with established foreign producers.

Export subsidies aren’t used to shield the domestic market; they encourage selling abroad. Deregulation reduces barriers, which goes against the protective approach of ISI. Free trade agreements promote openness and lower barriers, also opposite to ISI’s protective stance. So tariffs are the policy instrument that best supports protecting domestic capacity in ISI.