What Protection Costs

Lessons from economies that closed their borders

The winning team

Chet Booker was the third-generation owner of a manufacturing business outside of Lexington, Kentucky. They produced precision fasteners used in the aviation industry. The last ten years were characterized by intense competition from overseas suppliers. The workforce was down 20% from its peak, and Chet had invested nearly all of the company’s profits over the past five years in automation to help them compete. Despite these improvements, pricing pressure was intense and margins were slim.

His fortunes seemed to change after the new administration came into power. Sweeping tariffs raised the cost of overseas competitors’ parts by 40%. He raised prices 30% and still found himself running three shifts to keep up with demand.

He had a domestic competitor in California. When a friend with connections to the administration suggested that a modest donation and some public support might help Chet’s chances with defense contracts, he understood what was being offered. He made the donation and posted a photo with an official. Within six months, he was the preferred supplier for two major defense contractors while his California rival found their contracts mysteriously delayed, their applications lost, their inspections multiplied. Chet told himself they probably deserved it; they’d been dismissive of him at an industry conference once, called his operation “quaint.” He didn’t feel bad. He started thinking about a second factory, maybe passing something bigger to his son than what his father had passed to him.

Less than two years later, order volume was drying up. The second factory never happened. Chet thought he was going to hand the business over to his son; instead he was looking at a firesale to KKR. What happened?

A familiar arc

There have been moments in history when stories like Chet’s could be found in abundance: Spain in the 1940s, Argentina in the 1950s, Germany in the 1930s. The setting changes, but the arc is the same. A regime promises to secure national strength by closing the borders to foreign competition. Businesses that align with the regime flourish initially, but the good times are short-lived. The economy inevitably begins to rot, and in the end, no industry or company is spared.

The term for this policy is autarky, which is a state of national economic self-sufficiency. The goal of autarky is for a country to produce all goods and services it needs internally, minimizing reliance on international trade. Autarky is sold as strength through independence from foreign supply chains, protection from external shocks, and a high degree of self-reliance. Given the stated goals, autarky may sound reasonable in the abstract. To understand why it is so harmful in practice, we turn our attention to Francoist Spain.

The Spanish trap

Spain instituted autarky after the Nationalists won the Civil War in 1939. Tariffs, quotas, licenses, exchange controls, and outright bans gave Spain the thickest borders in Europe, all but eliminating trade.

The results were catastrophic. Agriculture had been Spain’s greatest strength. Exports of oranges, olive oil, wine, and sardines more than offset its grain imports. Spain had been an importer of tractors and fertilizer. When these critical inputs dried up under autarky, production collapsed. The policy caused a famine that killed 200,000 people. Black markets for grain became commonplace.

Industry fared no better. Self-imposed isolation forced Spanish factories to produce their own steel, coal, and basic consumer goods instead of importing cheaper, better inputs and specializing in higher-value work. State-controlled syndicates monopolized entire sectors, blocking private expansion. Favored firms thrived on government contracts, but absent competitive pressure, they stagnated. The incentive was to secure the permit, not to run an efficient plant. Firms optimized for quotas and political connections rather than productivity.

Spain was neutral in World War II. While Germany, France, and Britain saw their cities bombed and their industrial bases destroyed, Spain’s infrastructure remained largely intact. They should have had a decisive advantage in the postwar years. Instead, by the early 1950s, Spain’s GDP had fallen to just 40% of the Western European average. The countries rebuilding from rubble were outperforming a nation that had seen far less destruction and had a six year head start.

The gap was entirely self-inflicted. When Spain finally reopened to foreign investment and trade under the 1959 Stabilization Plan, the protected industries collapsed. Textile and consumer-goods factories that had expanded behind tariff walls turned out to be small-scale, obsolete, and unable to compete. Decades of protection had made them dependent, and their products were inferior and overpriced.

What followed was the “Spanish Miracle”, a period of rapid growth that quickly narrowed the gap with the rest of Western Europe. The turnaround proved what the previous two decades had cost. The stagnation wasn’t bad luck or external circumstances; it was autarky.

Trading prosperity away

We know, before a country closes its borders, roughly what it will sacrifice by forgoing specialization and trade. Economists estimated that trade barriers alone cost Spain 20% of a year’s consumption. The economic principles that predict this (comparative advantage and gains from trade) were established in the early 19th century, so the harm was eminently foreseeable. This raises a question: If autarky is so reliably destructive, why do regimes keep reaching for it?

The answer lies in the regimes that have implemented this policy: Peronist Argentina, Francoist Spain, Nazi Germany, and Apartheid South Africa.

Autarky is a tool for regimes that trade economic prosperity for ideological purity and control. Authoritarian regimes require centralized control. Autarky delivers it by eliminating the external forces that could threaten the regime: competition, foreign capital, international pressure, and the flow of information that accompanies trade.

When trade is choked off, the government becomes the primary buyer (or the gatekeeper to the only buyers), the sole allocator of permits, the gatekeeper to survival. Every firm’s fortunes now depend on political favor. This dependency breeds corruption, but this corruption is a feature, rather than a bug, in this system.

Once the rules change, businesses face a simple choice: participate or die. The firm that refuses to make the donation, to cultivate the connection, to play the game just loses to competitors who will. There is no neutral ground. The regime doesn’t need to coerce loyalty; it has structured the economy so that loyalty is the price of staying in business.

This is why autarky and authoritarianism travel together. Closed borders create economic dependency. Corruption converts that dependency into control. The firms that think they’re winning are actually being absorbed into a system they can no longer exit.

Eighteen months later

This brings us back to Chet, eighteen months after the photo with the official.

Chet’s political patron publicly disagreed with a cabinet official and soon found himself under indictment. Chet’s photo with him seemed to resurface every time Chet was close to landing a significant government contract.

The following year, the DoD shifted its priority to favor “national champions” (RTX/Lockheed Martin). Chet’s small-supplier status was revoked as “non-strategic”, and his government contracts dried up entirely.

He pivoted toward commercial aviation, only to find global demand buckling under counter-tariffs. Boeing’s international sales collapsed, and selling into Airbus became commercially impossible.

The large loans Chet took out to expand production under the promise of protection and guaranteed contracts made it impossible to ride out the downturn. By the time KKR came calling, Chet had run out of options. He sold for pennies on the dollar.

The factory tripled production the next month.