24 January 2017

Financial Times: Take the US president’s protectionism seriously

When the US president said in his inaugural address that “protection will lead to great prosperity and strength”, he was proposing the most dramatic changes in trade policy in years.

With Monday’s announcement that he wanted to renegotiate the North American Free Trade Agreement, and pull out of the almost-completed Trans-Pacific Partnership, Mr Trump signalled a clean break with recent bipartisan US trade policy.

What becomes of these particular manifestations of Mr Trump’s mercantilist obsession remains to be seen. But retreating to a zero-sum vision of the world economy, seeing trade deficits as prima facie evidence of cheating by a trading partner, and resorting to protectionism is profoundly retrograde. [...]

But Mr Trump will find it much harder to take such radical action as imposing his threatened 35 per cent tariffs on goods from Mexico. Even if he completely tore up Nafta and reverted to the “most-favoured nation” access the US offers to any member country of the World Trade Organisation, tariffs are generally way below 35 per cent.

From that point, Mr Trump’s options become increasingly destructive, from imposing emergency tariffs, to ignoring the WTO if it ruled such actions illegal, to pulling out of the WTO altogether. That would bring the architecture of global trade policy for the past 70 years crashing to the ground.

No country would gain from such an action, least of all the US. Supply chains would be shattered, driving up costs and retarding innovation. Goods would become more expensive for American consumers and the US’s own exports, from agriculture to services, damaged.

Relations with other nations, extending beyond trade, would be put under acute strain. Other countries, if they have any sense, would try to forge new pacts among themselves. Australia, one of the TPP’s members, has already signalled its desire to push forward with the pact without the US. But there is the risk, given the key role of the US in anchoring global trade and its governance, of retaliatory protectionism.

[...] The full outline of Mr Trump’s trade policy has not yet taken shape. It is unclear, for example, whether he is opposed to all free-trade deals or just multilateral ones, or deals with low-wage countries. The degree of resistance his worst instincts will face in his own administration or Congress is also unknown. What the first few days of Mr Trump’s presidency have shown is that he is not merely posturing. He believes protectionism will make America richer. The question now is how far he will get before he, and his country, discover just how wrong he is.

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