The rise of Trump protectionism and end of multilateral free trade agreements

Free Trade Agreements (FTA) have been at the forefront of US trade policies for many years. This is until the arrival of President Donald Trump and his so called “Trump protectionism” policy. But is Trump really pursuing a full protectionism policy? Or is it a new economic strategy? What impact will this bring to the US economy?

Understanding the Trump protectionism policy

President Donald Trump is known for the following 7 Step Policy to bring back jobs to the US:

  1. US withdrawal from the Trans Pacific Partnership – DONE (March 2017)
  2. Appointment of the toughest and smartest trade negotiators to fight on behalf of American workers.  DONE ( see full list of appointees here  
  3. Direct the Secretary of Commerce to identify all violations within current the trade agreements with foreign country is currently using to harm the US workers, then direct all appropriate agencies to use every tool under American and international law to end those abuses. – IN PROGRESS
  4. NAFTA negotiation or US will withdraw from the deal – IN PROGRESS
  5. Label China as currency manipulator and any country that devalues their currency in order to take advantage of the United States – DONE
  6. Bring trade cases against China, both in this country and at the WTO due to China’s unfair subsidy behavior – IN PROGRESS
  7. Stop China from stealing American trade secrets through the application of tariffs consistent with Section 201 and 301 of the Trade Act of 1974 and Section 232 of the Trade Expansion Act of 1962 – IN PROGRESS

With these seven steps, it is very obvious that Trump really wishes to put an end to multilateral Trade Agreements. However, it does not imply an end to bilateral trade agreements such as:

  • Australia
  • Bahrain
  • Canada
  • Chile
  • Colombia
  • Costa Rica
  • Dominican Republic
  • El Salvador
  • Guatemala
  • Honduras
  • Israel
  • Jordan
  • Korea
  • Mexico
  • Morocco
  • Nicaragua
  • Oman
  • Panama
  • Peru
  • Singapore

Trump protectionism and the potential collapse of FTATrump protectionism and the potential collapse of FTA

These bilateral trade agreements may still pursue, especially if and only if US benefits from it. However for countries such as Canada, Mexico, and Japan, these FTA’s may need to be reassessed. Otherwise, Trump may indeed withdraw from these.

With this in mind, the problem does not arise among US bilateral agreements, rather it is with with multilateral FTA’s such as the Trans Pacific Partnership (TTP) and North America Free Trade Agreement (NAFTA).

Why?

It’s as simple as what Trump has been reiterating via the media. These agreements were formed not for the US economy but for a “different” purpose.

Is this for a fact?

A closer look at these FTA’s, as the economic advisers of Trump shows delivering very few economical benefits to the US but a very strong and powerful political grip among nations.

Thus, the problem faced by non-supporters is not mainly the economics but the potential “dwindling” political position of the US.

What effect will this bring to the US economy if pursued?

They’ve highlighted the following consequences US may face if Trump continues with this strategic economic campaign:

  • Retaliation from foreign governments
  • Reduced global trade and exports
  • Loss of power as world leader in world economy

Given these potential consequences, is US ready to stand on its own? Let’s now go back to the history of FTA’s and see how it came to be.

History of FTA in the US

Free Trade Agreements were not originally part of the US government. But it may have actually been conceptualized in the 19th century trade divisive issue which involved slave and non-slave states.

Here is an overview about it:

A battle between the North and the South

In this decade, Northern manufacturers pushed for higher tariffs on competing imports while Southern cotton producers were promoting open trade policies.

Why is that so

Northern manufacturers were protecting their produce from incoming imports (Southern cotton producers) which are priced at a lower rate ( the southern cotton producers). On the other side, the Southerners are doing their best to promote their overproduce and one of the best ways of doing this is through open trade policies.

The catalyst of protectionism - cotton producers of the north and southThe catalyst of protectionism – cotton producers of the north and south

However, as years passed the trade leaned over to higher tariffs as the protectionist policies were embraced by more states in protection of the northern manufacturing sector. That is until the arrival of the Smoot-Hawley Tariff Act of 1930.

What is the Smoot-Hawley Tariff Act of 1930?

The Smoot-Hawley Tariff Acs is a law enacted to increase import duties by as high as 50%. The goal is to increase US farmer protection against the growing agricultural imports. However, this increased tariff isolated the US and led more economic restrains not only to the US but also to neighboring countries during the Great Depression.

Watch this video to see the impact this has brought to the US:

Transition to Open Trade Agreements

Northern manufacturers would have thought they have won the battle. But four years after the Smoot-Hawley Tariff Act of 1930, Secretary of State Cordell Hull, reversed this matter via the Reciprocal Trade Agreements Act of 1934.

Under this Act, lower rates were negotiated and can now be implemented through a presidential proclamation. It wouldn’t require any Congressional action and the rates would extend to all of the major US trading partners.

How was this made possible by Hull?

It would have been difficult to convince the protectionist group to easily give up their position, so Hull recruited US exporting industries into the process. Luckily the surplus in manufactured goods have become substantial which was sufficient to counterbalance the previously dominating textile importing industry.

However, the President’s power was limited to bilateral agreements.

Trading after World War 2: General Agreement on Tariffs and Trades (GATT)

After World War 2, more countries had the privilege to sit and discuss not only their economic and trading policies, but also their strategic defense. Thus the birth of multilateral trade agreements, one of which was the GATT.

This resulted to trade agreements that bind major free market democracies as an effective countermeasure to the Soviet Union and China.

Additional agreements that were implemented then included:

  • Kennedy Round (1963-67)
  • Tokyo Round (1973-79)
  • Uruguay Round (1986-94)

1980’s: A shift to Global Trade Negotiations (FTA)

Continuous political conflict, pushed the US postwar administration to pursue comprehensive free trade agreements that will further strengthen the ties among nations. However, preferential trade treatments were still present in some European countries. Thus the birth of the multiple trade agreements among nations.

Protectionism of the 1930s vs 2017

The Smoot-Hawley Tariff Act of 1933 has always been referred to by many economists when highlighting the many negative impacts of protectionism. No wonder many compare this to the current strategy of Trump.

Trump Protectionism vs the Smoot-Hawley Tariff ActTrump Protectionism vs the Smoot-Hawley Tariff Act

The Result of the Smoot-Hawley Tariff Act of 1933

During the 1930’s, supporters of protectionism believed the road towards protectionism is the key in resolving the following problems:

  • Unemployment
  • Support for the agriculture sector
  • Increased revenue through tariffs

Sadly, the result didn’t go in favour of these. Rather, the Smoot-Hawley Tariff Act resulted to US total volume of world trade decline of $1B from a monthly average of $2.9B in 1929. That is a massive $1.9 loss of world trade in just a matter of 4 years.

In addition to these, production and unemployment went up leading to 13M idle worker by 1932. This is a big leap from only 3M idle worker of 1930.

The result of protectionism under the Smoot-Hawley ActThe result of protectionism under the Smoot-Hawley Act

Will the Trump protectionism approach suffer the same fate as predicted by some economists?

Analyzing the Trump Protectionism policy

Power only comes with money and with a dwindling economy caused by a growing number of unemployment – the US may indeed soon enter depression again.

The better solution is to cure the infection before it becomes a disease that will contaminate the entire US nation. So let’s take a look and see what Trump has accomplished for the past months.

Trump and the battle with car manufacturing

Trump has been criticised with his plan, but it is clear that the majority of the population still has his support. He had won over Hillary Clinton 306 vs 232 electoral votes and this is because of his promise of being jobs back to the US. with a margin of 25%. Thus, all his policies are geared into fulfilling this promise.

Electoral votes between Trump and ClintonElectoral votes between Trump and Clinton

At present, many companies have already shared their support to Trump and the numbers have shown a positive response. Here is an excerpt of his speech during his first address to the joint session of Congress last February.

Since my election, Ford, Fiat-Chrysler, General Motors, and many others, have announced that they will invest billions of dollars in the United States and will create tens of thousands of new American jobs.

In as much as he has been criticized, there is no doubt that retaining jobs within the US, especially that of the car manufacturing industry, has been growing and been stable during his administration.

US without multilateral trade agreements

With this move from the US, it’s possible that a multilateral trade agreements may soon cease to exist. This is most true as many have seen the insufficiency it brings to a country. Proof of this is the slow decline of the European Union and the Brexit.

More and more countries are going back to the basics of trading, that is to focus on the intrinsic profit motive in business. A trend back to the issue of self “country” interest (protectionism) is also slowly dominating the world, which will most likely lead to the disintegration of these types of agreements.

Trump, being a born a businessman, knows this very well. Thus his choice of bilateral trade agreements rather than FTA’s.

Why choose bilateral trade agreements over multilateral trade agreements

Bilateral relationships by their very nature hold strong bonds because the two parties know what each is getting and losing in the relationship. Upfront they know how to exit from the relationship if the need arises.

Will this bring back the glory of US? It is still too early to state but the numbers show these:

Stock market is on the rise

The hopes for Trumps action on tax policy, infrastructure spending and deregulation helped propel the market higher after Mr. Trump’s victory in November. This may still be in the negotiating table but the public is optimistic about this.

Trump protectionism: soaring stock marketTrump protectionism: soaring stock market

Unemployment rate has declined

At 4.3 percent in July, the unemployment rate is near its lowest level since early 2001. We see happy faces but the challenge they now bring the President is to to break the 4 percent threshold — that hasn’t been done since President Bill Clinton’s last full month in office in December 2000, when unemployment was at 3.9 percent.

Trump protectionism: declining unemployment rateTrump protectionism: declining unemployment rate

Stable GDP growth

It is still hard to claim if the GDP is on the rise. What we can assess is that it remains fairly stable.

Trump protectionism: stable GDP growthTrump protectionism: stable GDP growth

Given these, can we say that Trump is doing a great job? It is still hard to say as he has only begun his economic campaign. For now, let us observe how the Trump protectionism approach will help the US economy.

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