Protectionism is unlikely to prevail. Here's why
Most reports about globalization in recent years have focused on its problems, such as declining levels of trade and the abandonment of “mega-regional” trade agreements. Indeed, US President Donald Trump has now terminated the Trans-Pacific Partnership (TPP) – a trade deal among a dozen Pacific-rim countries, including the United States and Japan; and negotiations on the Transatlantic Trade and Investment Partnership (TTIP) between the US and the European Union have come to a halt.
But headlines can be misleading. Although new trade deals can spark controversy, it is highly unlikely that protectionism will prevail. This is true even in the US, where Trump was elected on the promise of getting tough with major trading partners such as Mexico and China. So far, the Trump administration has taken no action suggesting that a new era of protectionism is at hand. And in Europe, the benefits of economic openness have been widely acknowledged, and negotiations on a free-trade agreement with Japan are currently underway.
Most developed countries remain fairly open today, and this pattern will likely continue. A new surge of support for protectionist policies would require a coalition of powerful interest groups to organize a campaign aimed at changing the status quo . With average tariff rates at negligible levels (below 3% for both the US and the EU), who would support a push for higher barriers?
In the past, coalitions of workers and capitalists from the same industry would lobby for protection. Their interests were aligned, because higher tariffs allowed workers to demand higher wages, while capitalists could still make higher profits in the absence of foreign competition. The infamous 1930 Smoot-Hawley Tariff, which many believe helped precipitate the Great Depression, was the result of such lobbying.
Today, however, the interests of workers and capitalists are no longer aligned. Most manufacturing is now dominated by multinational firms that operate production facilities in many countries. This is particularly evident in China, where US and European companies have made huge investments. Any policy that hurts the Chinese economy will hurt them, too.
Foreign-owned enterprises account for about half of China’s exports; and US firms are the biggest investors in the country. So, if Trump followed through on his campaign promise to impose a 45% import tariff on Chinese goods (most likely in violation of World Trade Organization rules), he would strike a major blow to US multinationals’ profits. This may explain why most of the administration’s protectionist rhetoric comes from Trump and some of his academic advisers, and not from the experienced CEOs who occupy key cabinet positions.
Another major difference today is that many firms are a part of global value chains, whereby goods are assembled in countries like Mexico or China from imported components, the most sophisticated of which often come from the US. If these countries imposed tit-for-tat measures on US imports, the US companies that export those components would suffer, as would companies that collect royalties on intellectual property used abroad.
Those who want to “get tough” on China or Mexico claim that their goal is to persuade US companies to make their products entirely in the US. But assembly is usually a low-skill, low-wage activity at the bottom of the value chain. So, slapping a tariff on goods made in China would only push assembly operations to other low-wage countries, not back to the US.
The same can be said with respect to Mexico. Withdrawing the US from the North American Free Trade Agreement would do little to create high-paying jobs in the US. It is worth noting that US labor unions that opposed NAFTA 20 years ago have not rallied behind Trump’s threats against Mexico.
To be sure, the presidency grants Trump considerable power to shape trade policy, so one cannot ignore the possibility that he will pursue protectionist measures to appease his supporters. But, ultimately, there is no broad-based support in the US for a return to closed borders.
Europe, meanwhile, has been moving in the opposite direction. European multinationals also have large stakes in the Chinese economy, and EU manufacturing exports to China and other emerging markets are now almost double those of the US. Many Europeans see trade as an opportunity, rather than as a threat to jobs; and even Europe’s staunchest anti-globalizers show little appetite for more protectionism.
Still, if there is little support for reversing free trade nowadays, why is there such vocal opposition to major trade deals? In the US, manufacturing workers’ wages have long been stagnant, and job opportunities in the sector have fallen rapidly. As these trends coincided with high trade deficits, the two issues became politically intertwined, even though most studies show that automation has been a much more important factor in the decline of manufacturing as a share of overall employment.
Manufacturing in Europe is doing better than in the US. But there are still protests against the TTIP – and, to a lesser extent, against the EU’s recent trade deal with Canada – because some object to “new” deals that supposedly subordinate local standards and regulations to those of trading partners. Large trade deals often introduce new health and safety requirements that become much more politically charged than cuts to already-low tariffs. Northern European countries, in particular, cherish their local standards and spurn the thought of eating chlorine-disinfected chicken or genetically modified fruits and vegetables, even if there is no scientific evidence that these production methods pose a health threat.
But the unpopularity of mega-regional trade deals in advanced economies does not imply broad-based support for a return to protectionism. The “bicycle theory” of trade liberalization – that it will collapse unless it keeps moving forward – is wrong. European policymakers should ignore the protectionist noises coming from Trump’s administration, and concentrate on defending the current global trading system and the liberal international order.
SOURCE: World Economic Forum