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Protectionism and its risks

 

EVEN BEFORE THEY claim their baggage at the airport, visitors to the city of San Luis Potosí in central Mexico see an advertisement for the site where Ford Motors was planning to build a $1.6bn factory. The Planta Ford is still marked on a map in the arrivals hall, albeit only on a Post-it note. Follow the map, and you will see the factory’s white steel skeleton standing out against the brown hills of the Gogorrón National Park.

Ford’s facility, intended to build its small Focus cars, would have created 2,800 jobs directly, and many more indirectly. But in January the company announced it was pulling out and investing $700m in Flat Rock, Michigan, instead. President Donald Trump, who had threatened to impose border taxes on carmakers that shifted production to foreign locations, was delighted. “Thank you to Ford for scrapping a new plant in Mexico and creating 700 new jobs in the US. This is just the beginning,” he tweeted to his many followers. Everybody in San Luis Potosí, by contrast, was “a little bit upset”, notes one resident.

Eight months into his presidency, Mr Trump’s trade stance does not look quite as upsetting to emerging markets as many had feared. Despite his campaign threats, he has not imposed 35% tariffs on companies relocating to Mexico or 45% tariffs on goods from China. Nor has he yet withdrawn from the North American Free Trade Agreement (NAFTA).

So far the world has not embarked on a trade war, at least judging by the ballistic evidence. The members of the World Trade Organisation (WTO) between them imposed about 11 new trade restrictions per month in the seven months to mid-May 2017, the lowest rate since 2008. They also initiated 25 trade “remedies”, such as anti-dumping duties or countervailing tariffs against subsidised imports, which claim to redress unfair trade (rather than restrict free trade). That was in line with the monthly average for the past five years.

But there is no room for complacency. Sometimes the damage Mr Trump has inflicted on the global trading system must be measured not against the status quo but against what might have been. In his first week in office, for example, he withdrew from the Trans-Pacific Partnership, a trade and investment agreement with 11 other countries, including Chile, Mexico and Peru. The agreement might have added 8% to the GDP of Vietnam by 2030, according to calculations by Peter Petri of the Peterson Institute for International Economics and Michael Plummer of Johns Hopkins University, and almost as much to the economy of Malaysia. White House officials have said that quitting America’s trade agreement with South Korea is also a possibility, though no longer a priority. Such a cavalier attitude towards existing agreements will make future deals harder to strike.

Mr Trump has also quietly undermined the World Trade Organisation, and the multilateral principles it represents, by working around it. His government has launched an investigation into China’s abuses of intellectual property, invoking old American legal provisions that the WTO was supposed to supplant. And he has refused to begin the process of appointing new judges to its trade tribunals.

Rather than impose sweeping tariffs against entire countries, Mr Trump’s administration has turned to more targeted measures, such as anti-dumping duties, against individual products. These trade “remedies” can be deployed without getting bogged down in Congress. Indeed, the administration has said it will initiate more of these investigations itself, rather than wait for aggrieved American industries to plead for them. 

America the dutiful

How much difference will this new American trigger-happiness make? Duties against dumped or subsidised products covered 3.8% of American imports at the end of 2016, according to calculations by Chad Bown of the PIIE. The investigations now under way could almost double that figure to 7.4%.

Not all of the new duties will apply to emerging economies. The threat of steel restrictions poses a bigger danger to the European Union and Canada than to China. And many of the more obvious emerging-market targets have already been hit. China’s exporters, for example, are already accustomed to such pinprick protectionism. At the end of last year the country was subject to 139 such measures, covering 9.2% of its American sales.

So the increased use of remedies will not be fatal to emerging-market exports, but it will be a growing irritant, especially if the countries concerned feel compelled to impose tit-for-tat tariffs. Retaliation would be easier to resist if the administration were to act quietly, but quietude has not been one of its virtues.

The emerging economy most at risk from Mr Trump’s trade instincts remains Mexico, which is now locked in a difficult renegotiation of NAFTA. America wants to tighten the agreement’s rules of origin, which determine what counts as a North American product. It wants to add provisions against currency manipulation. It also seeks a freer hand to impose duties on dumped, subsidised or surging imports, and it wants American courts, not NAFTA panels, to resolve investment disputes. These and other measures, it hopes, will eliminate the big trade deficits it now runs with both the other members, Mexico and Canada.

Yet it is not clear how a trade agreement like NAFTA can curb a trade deficit. Suppose a renegotiated agreement allowed America to impose higher tariffs in the name of narrowing its import-export gap. Those tariffs would limit the demand for foreign currencies. That would reduce their price, making them more competitive against the dollar. That, in turn, would tend to undo the effect of the tariff.

One NAFTA member already has experience of trying to engineer a better trade balance by fiat. Back in 1993, Mexico required manufacturers to export $2-worth of cars for every $1-worth of car imports. NAFTA phased out such practices, and Mexico’s car industry has never looked back.

If Mexico has to concede anything to keep NAFTA alive, it might accept a ban on currency manipulation. Since both Canada and Mexico let their exchange rates float, any such prohibition would probably remain redundant. But it would allow America’s president to claim an unprecedented breakthrough: incorporating currency safeguards into a trade agreement for the first time. That would make a good tweet. With luck, he and his team would then declare victory and go home.

San Luis Potosí, for its part, seems to have shrugged off the Ford setback. About 3km east of the abandoned site, BMW is building a new factory of its own that will eventually employ 1,500 people. “I think the city is [enjoying] one of our best times,” says a local resident. “For sure, other companies will come at the end of the day.” Formal employment in the state increased by 7.7% in the year to May. The governor has boasted about the pace of job creation on Twitter, where he has over 50,000 followers. In matters of populism, two-way trade remains strong.

Correction (October 6th, 2017): A previous version of this piece suggested that the Trump administration had already initiated many trade-remedy cases, rather than merely prepared to do so.