Trump and the Show of Defiance Toward Free Trade

Protectionism will not help recover industrial jobs in the U.S., since most of the low wage activities which are carried out today in Mexico or China, if moved to the United States, surely will be automated in a few years.

There are few doubts left. The “Trump president” will be the same as the “Trump candidate.” And as part of his campaign was based on defending economic nationalism and trade protectionism, it is very likely that the global trading system as we know it will change during his presidential term.

Trump and his advisers seem to have four principles upon which they are designing the new U.S. commercial strategy. The first principle is that the multilateral commercial system interwoven with a liberal edge in the World Trade Organization has allowed the rest of the world to abuse the U.S. and therefore it must be modified. The second is that trade deficits are harmful and it is necessary to eliminate them. The third is that the U.S. must use its force to negotiate more favorable bilateral trade agreements, and that it will succeed in such negotiations because in the event of a trade war, other countries may lose more than the U.S., in which case, it will lead them to surrender. And the last principle is that this neo-mercantilism should serve to re-industrialize the U.S. and create jobs.

None of these principles has much validity. In fact, the mercantilist doctrine, which is that exports are good and imports are bad, failed to raise levels of economic prosperity or stabilize international relations, as would be done at a later point in the practice of trade liberalization under multilateral rules.

A trade deficit is not good or bad per se. It assumes that more is spent than is produced, but if that expense is reflected in investments that increase future growth, there should be no problem. Also, the idea that the U.S. trade deficit with Mexico, China or Germany could be reduced quickly by imposing tariffs, and that this would raise the level of manufacturing employment in the U.S., is quite misleading.

It is true that the work of David Autor has shown that there are certain areas of the U.S. where Chinese imports have eliminated much manufacturing employment, as well as industrial workers who have lost their jobs and have failed to find new jobs in other sectors. However, the reality is that the industrial decline has affected all advanced countries, that industrial production has increased although industrial employment has fallen (due to increased productivity) and, more importantly, that automation seems to have much more weight than trade in explaining the reduction in industrial employment. Thus, according to the reasons mentioned above, protectionism will not help to recover industrial jobs in the U.S., since most of the low wage activities which are carried out today in Mexico or China, if moved to the United States, surely would be automated in a few years. This doesn’t mean that there is no need to help the long-term unemployed who used to work in the industry and, above all, depressed regions that have suffered from de-industrialization and need to be supported by the government. But protectionism is not the solution. Neither is revoking former President Barack Obama’s health care law, which at least gives the unemployed free access to health services.

Finally, thinking that the GATT/WTO system that the U.S. set up after World War II has caused other countries to abuse the good intentions of the U.S. is, at the very least, exaggerated.* It is true that at first, European countries, and later emerging ones, benefited from the liberal and open economic order led by the United States. But it is also true that the main reason the United States created and maintained this order was geopolitical, and served both to prevent the advance of communism in Western Europe during the early years of the Cold War and to accommodate the emerging powers in an international order in which the United States remained the main hegemonic power. In fact, the main objective of the Trans-Pacific Partnership, which has been the first victim of Trump’s protectionism, was to contain the geopolitical rise of China in Asia.

If Trump and his advisers are faithful to their principles, we must be prepared for sudden changes in the global trading system. The first thing that will happen is that the agreements in progress will be stopped. The TPP has died. And the U.S. aims to negotiate bilateral agreements with major signatory countries, something that may never happen if China seizes the opportunity to lead a broad agreement in the Pacific that does not include the United States. For its part, the TTP, the agreement which the U.S. was negotiating with the European Union, if not also dead, has entered into a long hibernation. In fact, it seems that the U.S. would be interested in negotiating bilateral trade agreements with the countries of the European Union, something which is not possible since the member states have transferred their commercial policy to Brussels. Perhaps for this reason, Trump wants to destroy the European Union.

On the other hand, it is very likely that the U.S. will eliminate NAFTA (the agreement with Canada and Mexico) and replace it with bilateral agreements with both countries. This would be important from a symbolic point of view because, despite the fact that there is wide empirical evidence that the impact of NAFTA on the U.S. economy was small, a significant part of public opinion (and most voters) think that the agreement served to take away many jobs from the U.S. to the south. The bilateral agreement with Canada should not be difficult, but negotiating with Mexico will be the first test to assess whether the strategy of the tough negotiator works or not. And given Mexico’s dependency on the U.S. economy, it might work.

Thereafter, it is likely that Trump will focus on China, whom he has threatened with 45 percent tariffs. But it is not likely that the Chinese will be intimidated and that is where the main risk of trade war appears, which reminds us of the 1930s during the last century. A tariff escalation between China and the United States would lead to a significant drop in global trade as both countries are an essential part of global supply chains. And, if China denounced U.S. protectionist measures to the WTO and won, we would have to see if Trump would remove his country from the organization as he promised in the election campaign. If so, it would be the beginning of the end of multilateralism.

Federico Steinberg is the principal analyst at the Elcano Royal Institute, and professor at Universidad Autónoma of Madrid. @steinbergf

*Editor’s note: GATT stands for the General Agreement on Tariffs and Trade, a multilateral agreement regulating international trade signed in 1947 and designed to reduce tariffs, trade barriers and trade preferences “on a reciprocal and mutually advantageous basis.” It lasted until the World Trade Organization was established in 1995 and its text is still in effect within the WTO framework.