When Import Tariffs Become a Boomerang for American Consumers

Neo-protectionism, Act 1: Withdrawal from the Trans-Pacific Partnership agreement. Neo-protectionism, Act 2: The CEOs of America’s major companies are summoned and threatened with a barrage of taxes and tariffs unless they create new workplaces in the USA. This is the beginning of Trump’s strategy for global markets. A strategy based on a scapegoat (international trade) as well as on a very simple and counterproductive solution (trade barriers) for the very complex issue of unskilled workers’ unemployment and diminished purchasing power. In the end, the United States and its trade partners will go through great hardships. That is, unless the pain threshold is reached fast enough to induce a sudden U-turn.

Backing out of the TPP means leaving transpacific trade under Chinese influence. This agreement was going to exclude China, thus creating a huge free trade area between the Pacific coast of the American continent and the main Asian countries, Australia and New Zealand. Without the USA, the agreement is moot or almost moot. The inevitable consequence is a new trade geography in the area, with higher Chinese influence. Today, Australian Prime Minister Turnbull has declared himself in favor of including China in the TPP. Since Trump is mainly worried about Chinese workshops and their low-priced goods causing American factories to close, rejecting the TPP seems a rather masochistic and ineffective act.

To fully implement his strategy, Trump will still have to deal with the Chinese question directly. Then the issue will get really thorny. It is one thing to pressure China into abstaining from unfair trade practices through the instruments of the WTO, such as anti-dumping actions. Downright raising trade barriers is quite another. It is unlikely the U.S. will manage to make good on this threat without leaving the WTO and without starting a trade war that will certainly do no favors to America.

The TPP had the merit, among others, of setting standards for work and environment conditions that significantly reduced the competition margins for countries with low labor costs. Compared to raising trade barriers, negotiating for the improvement of standards in these countries is a much smarter, globally useful and efficient way to protect workplaces in mature economies. Even China would have had to adopt similar standards, had the agreement been passed.

Another shortsighted move is forcing businesses to return to the USA. No matter how many tax breaks and decreases in regulations Trump promises, the unskilled jobs that were lost in the last several decades will certainly not be recreated. Businesses that produce goods in America can only do so by focusing on high technology content and high value-added activities. Creating unskilled jobs and decent salaries is an impossible equation for many companies in the U.S., and trade barriers will not solve this. What kept American industries afloat was the reorganization of the global value chain within NAFTA, with the delocalization of labor-intensive activities to Mexico. This allowed them to maintain high value-added work in America and increase productivity. This process is very similar to the one the EU carried out after expanding east.

Technology dynamics and trade with low-wage manufacturers make this process irreversible. From the standpoint of employment, it is a painful process. However, at the same time, it is the only way to facilitate a requalification of manufacturing companies in America and to create new jobs.

To create new unskilled jobs, Trump would have to take his protectionism to the point of autarchy. If his early moves degenerated rapidly toward a complete isolation of the U.S. from international trade, then fragmenting production globally would no longer make sense.

However, another issue would arise. Import tariffs would make consumer goods more expensive for American citizens, especially for those with a low salary. They are a de facto tax for the poor. Trump forgets that work in Chinese sweatshops has generated a significant increase in Americans’ purchasing power, especially for the poorest. His strategy of blindly peddling fairy tales is unlikely to create workplaces. Moreover, it will certainly reduce workers’ purchasing power.

One can only hope the road of protectionism is littered with enough thorns to result in it being quickly abandoned. This suffering may cause a return to reason.