By Valentin A. Araneta

The world economic community is now greatly concerned with the “America first” policy of the Trump administration which has protectionist implications. Protectionist policies imply tariff and non-tariff barriers designed to make the importation of goods and services so expensive so that these will instead be produced in the United States and thus employ more people in the domestic production of such goods. The result would be that the industries and employment of the countries exporting to the US would be adversely affected. However in a global economy where production and trade structures are heavily interlinked, the country that initiates protectionist policies could end up suffering as much if not more as the rest of its trading partners in the long run. This is because protectionist policies of a country tend to push up its production and labor costs and therefore its products become less competitive. A big proportion of the goods and services produced in the US are sourced from abroad because they can be produced more cheaply there. If the Trump America first policy insists that these goods and services be produced only in the US, the costs of production in the US will grow substantially. The ironic result of Trump’s protectionist policies could be that the rest of the world realigns trade agreements and structures over time and the balance of trade deficit of the US that Trump says he wants to correct could end up actually worse than before. The balance of trade deficit that he has been complaining about is actually self-adjusting in the capital accounts and that is why the US dollar has been considered strong in spite of the chronic trade deficit of the US.

Trump may think that he is talking from a position of strength because of the size of the US market. In the table below, we can see that the US accounted for over 24 percent of the world’s GDP in 2015. However this means that the rest of the world accounted for the balance of over 75 percent of the world’s GDP. Actually, the respective share of the world’s GDP of the trading blocs composed of the European Union and BRICs (Brazil, Russia, India, China, and South Africa) approximate that of the US. What is actually even more remarkable is that the ratio of the exports of goods and services to GDP of the trading blocs is much higher than the United States. If the America first policy of Trump causes further realignments of trading blocs, increasingly higher ratios of trade to GDP of the rest of the world could be the result and with the US ending up in in a diminishing role in world trade. Take for instance the combined ratio of exports of goods and services of Canada and Mexico who are the two other members of the North American Free Trade Association (NAFTA) aside from the US This ratio is 33.2 percent, almost three times that of the ratio of the US.

2016 marked the first time in 15 years that the growth in world trade grew more slowly than the growth in world GDP and this was even before the Trump administration took over the reins of the US government. For 2017, world trade is expected to grow more slowly than the growth in world GDP again. This cannot be allowed to be the trend because it is world trade through the implementation and transfer of technological and organizational innovationsthat leads world economic growth and progress. For this reason, trading and multilateral organizations are placing great emphasis on the need to sustain trade liberalization and cooperation among all countries. It is also important for countries contemplating protectionist policies to realize that protectionism is not good for their economies in the long run.

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The opinions expressed here are the views of the writer and do not necessarily reflect the views and opinions of FINEX. You may email Mr.Araneta at [email protected]