The horror of protectionism
The U.S starts a trade war
On March 1, the President of United States, Donald Trump, fired the starting gun to a wave of protectionism. As soon as he announced to slap an import tariff of 10 % on imported aluminum and of 25 % on imported steel, America’s major trading partner, including the European Union, declared that they would not accept such a policy and were ready to retaliate. Trump, in return, threatened to widen his protectionist policy and expand his tariff policy on the import of cars.
Trump’s intervention comes at a time, when higher interest rate, inflation, and a widening budget deficit are in the making. Protectionism would the fourth horseman to complete the group of the apocalyptic riders.
The U.S-administration blames ‘unfair’ trade practices as the reason for its policy. President Trump tweeted the day after his announcement to impose tariffs that “(o)ur Steel and Aluminum industries (and many others) have been decimated by decades of unfair trade and bad policy with countries from around the world. We must not let our country, companies and workers be taken advantage of any longer. We want free, fair and SMART TRADE!”
Protectionism would mean the end of a policy that has been in place among the industrialized countries and for a large part of the developing countries since the end of World War II. The spread of protectionism would not only be a shift of policies but a major change.
Backgrounder on Trade
Curing trade deficits through mercantilist policies is recurring error of policies. It is true that the United States suffers from persistent trade deficit which in turn lead to the country’s high foreign debt. The United States has had a trade deficit since the early 1980s. In terms of the broader category of the current account, the balance of the United States has been negative since 1982. In 2006 the current account deficit in percent of America’s gross domestic product reached six percent and stands currently at 2.6 percent.
Current account deficits require corresponding capital imports. This way, the overall foreign debt of the United States to around eight trillion US-dollars in 2017.
Why tariffs don’t work
Economic theory shows that trade deficits reflect domestic imbalances of country between savings and investment. Insufficient domestic savings imply excessive consumption. In order to fill the gap and provide the funds for investment, the country must import capital from abroad.
Different from other countries, the United States has not yet faced a currency problem. In terms of its purchasing power the U.S.-dollar is overvalued against almost all other currencies of the world. A sufficient devaluation of the exchange rate has not taken place in the case of the United States because the U.S.-dollar still serves as the major international reserve currency. This allows the United States to borrow in their own currency.
Led by Vietnam with an annual growth rate of its gross domestic product of 7.46 percent in the third quarter of 2017, other high growth emerging market countries comprise Egypt (5.3 %) in the Middle East; Rwanda (4.9 %) and Nigeria (4.3 %) in Africa; and Ireland (4.2 %) and Moldavia (3.6 %) in Europe. Bolivia had a growth rate of 6.6 percent in the third quarter of 2017, yet this came after a contraction of 7.8 percent in the period before.
Venezuela leads the table with an annual inflation rate of 741 percent as of February 2017, followed by South Sudan with an annual rate of 117.7 percent as of December 2017. The Congo suffers from an inflation of almost sixty percent and Syria of over forty percent.
In the industrialized countries, inflation rates are very low. As of January and February 2018, both Japan and Germany register an annual inflation rate of 1.4 percent. The average of the European Union is 1.2 percent, and in the United States, the annual inflation rate in January 2018 was 2.1 percent.
In terms of unemployment, there are dramatic differences among the countries. Congo has an official unemployment rate of close to fifty percent, Namibia has a rate of thirty-four percent, while Gambia has close thirty percent. Low-unemployment comprise Qatar (0.2 %), Thailand (1.2 %), Vietnam (2.2 %) and Uganda (2.3 %).
The situation concerning the current account balances is very uneven. Some countries have double digit current account surpluses, such as Singapore (19 %), Taiwan (13.4 %), Thailand (11.5 %), and Switzerland (11 %), while other countries suffer from extreme deficits of their current account balance in percent of gross domestic product such as Mozambique (-37.9 %), Libya (-37.8 %), the Republic of Congo (-24.2 %), and Niger (- 19.4 %).
The phenomenon of nominal negative interest rate persists in several countries, such as in Switzerland (-0.75 %), Denmark (-0.65 %), Sweden (-0.50 %), and Japan (-0.10 %).
China’s economic growth seems to have no end in sight. The Chinese economy expanded 6.8 percent annually in the last quarter of 2017, the same as in the previous three months. It is hard to believe, but the official inflation rate is 1.5 percent as the average over the past year until early 2018. With an unemployment rate of under four percent, China, so it seems, has a perfect macroeconomy. Since early 2017, China’s currency has experienced a slight appreciation from seven yuan per dollar in January 2017 to 6.2 yuan per dollar in March 2018.
China’s export performance is still strong. China’s rose 11.1 percent over the year up to January 2018. After an extreme surplus of 9.3 percent in 2008, China’s current account balance has stabilized around a surplus of two percent since 2011.
The South Korean economy experienced negative growth of 0.2 percent on quarter in the quarter to December of 2017 compared to a 1.5 percent expansion in the previous period. It was South Korea’s first contraction of its gross domestic product in nine years. GDP Growth Rate in South Korea averaged 1.80 percent from 1960 until 2017, reaching an all-time high of 7.8 percent in the fourth quarter of 1970.
Argentina is on its way of recovery. The annual growth rate has reached 4.2 percent in the third quarter of 2017 after 2.7 per cent in the quarter before. However, the currency continues to weaken and has reached 20 pesos per dollar in March 2018. The inflation rate is still very high at 25 % and has not yet shown signs of falling more since it had come down from over forty percent in 2016.
Brazil’ economy continues recovering. The annual growth rate of the gross domestic product in the fourth quarter of 2017 amounted to 2.1 percent, after a still negative growth rate at the end of 2016. The inflation rate is falling again. After having come down from around five percent in early 2017, the rate fell to less than two and a half percent in the middle of the year. As of January 2018, the country’s inflation rate now stands at 2.86 percent. Unemployment is still high. After falling from close to 14 percent in early 2017 to 11.8 percent by the end of the year, Brazil’s unemployment rate is up to 12.2 percent again in January 2018.