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Making America Great again? An insight into Protectionist America

November 11, 2019

I am not the first to raise an eyebrow at Donald Trump’s questionable leadership style. However, amidst the petulant tweets, sexist remarks and naming a fellow global leader “rocket man”, there lies a more damaging philosophy that continues to threaten the welfare of Americans.

 

Over the past 200 years we have witnessed a strong correlation between growth in trade and economic growth. Free trade has enabled countries to specialise in producing goods in which they have a comparative advantage, allowing for an efficient exchange of goods and services between economies. This relationship between trade and growth cannot be underestimated. China is a notable example of the strength of this relationship, with its 2.96% average annual change in exports as a share of GDP generating an average annual rise of 4.34% in GDP per capita from 1945 to 2014. 

 

So with all this said, why is Trump reversing this trend, and even more importantly, why don’t more Americans care?

 

The answer to this question lies in the government’s aim to focus on increasing domestic employment through tariffs (taxes on imported goods). Tariffs are designed to reduce competition for domestic firms, who would otherwise have to operate at world prices determined by foreign competitors. This is especially aimed at smaller firms, who don’t benefit as much from economies of scale, and thus have higher costs, needing  higher prices to be profitable (also known as the ‘infant industry argument’). Less competition, higher prices, higher profits, more businesses and more employment opportunities. Simple right? In theory, it seems effective, but in practice, it can be quite the opposite.

 

The Trump administration has placed tariffs on many imports from China, starting in early 2018 with a 25% tariff on steel – one of China’s main exports – amongst others. This move was intended to promote growth by US steel producers, but it also brought on a wave of retaliatory tariffs to US exports. This has driven up the price of many goods for US consumers, with a J.P. Morgan study estimating that the tariffs until August 2019 will cost each US household an additional $1,000 per annum. This naturally makes households worse off as they are left with less disposable income. 

 

China’s retaliation has also hurt US farmers, particularly in industries  such as soybeans, wheat and por. Agricultural exports fell from $24 billion in 2014 to $9.1 billion in 2018. It surprises me that despite the lack of export revenue for domestic farmers, July 2019 polls suggest that most farmers will continue to support Trump and 78% believe that the trade war will be beneficial for US agriculture in the long run. 

 

It’s astonishing that there is still significant support for a man who often makes baseless promises and fails to deliver. An example was the aim to reduce trade deficits – something which was a key pillar in his 2016 electoral campaign. The reality is that despite his tariffs, the trade deficit with China rose 11.61% in 2018, reaching $419.2 billion. This highlights how his damaging policies are not yielding results, merely contributing to a slowdown in global economic growth. It will be interesting to see the outcomes  of the November APEC Summit, and if the US will continue their tariff hike which is scheduled to come on the 15th of December.  

 

From an economic standpoint, protecting an inefficient industry in the US or China is very costly and cumbersome. Trump should try and avoid contributing to the global economic slowdown with these protectionist policies, especially as investors are beginning to prepare for the next economic crisis.  A more delicate and considerate approach to trade and international relations is required to deliver a better result for domestic and world growth. Then, Trump might be one step closer to actually achieving something “great”.

 

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