Reverting to protectionism
Imagine you're participating in a TV show and you're asked to guess which US presidential candidate has said that many Americans are angry because of the state of the economy, which is rigged in favor of the elites. This statement could've easily been Trump's or Hillary's, or Bernie's. And not because of the cynicism of the former two, both representatives of the economic and political elites, respectively. Kind of doesn't make sense to hear a top-1-percenter whining against the privileged, right? It's just that both presumptive nominees (what a weird term) are now eager to ride the wave of protectionism that's been sweeping across hearts and minds in America, and is shaping up to become the new slogan at the upcoming general election. Oh, by the way, the words are Hillary's. She said them back in February at the Uni of Wisconsin. Funny, right?
In short, the main reason for a freshly renewed protectionism schtick is that more and more US workers are worried they could lose their jobs if the trade agreements with other parts of the world kick in, and cheap stuff from China starts undermining the US economy. The presidential candidates, in turn, are tempted to play by that tune and use it in their favor to garner support and earn votes. Doubtless, Trump is more extreme in his statements than Hillary. He has turned the debate on free trade into one of the pillars of his campaign, hurling numerous tough utterances against China, Mexico and Japan, and proposing a 45% tariff on all Chinese goods. But Hillary is not too far behind, either. She has said she doesn't support TPP, although just a few years ago while she was Secretary of State, she called it the "gold standard" of trade agreements. This "evolvement" of hers shows that the popularity of open economy and market is dwindling. And that's a rather risky tendency in the current situation, where the global economic growth remains way below the pre-2008 levels (this year's WB forecast is for 2.4%), and the G-7 leaders still can't come up with a way to bolster it.
If we look at the data, it would appear the Americans don't have much to rant about regarding employment. After the dip in the crisis years ('09-'11), unemployment started to go back down and reached 5.3% last year. A rate that many European countries could only dream about. But under the surface, the situation is not as good, given the fact that the US Bureau of Labor Statistics only tracks those who've actively sought jobs for the past 4 weeks. The latest labor data shows that last month, hiring new employees has sharply plummeted, and many analysts explain this with the fact that many Americans have actually given up looking for a job.
The number of Americans who don't even feature in the stats as part of the work-force (be it because they're still in school, or they've just stopped looking) is nearly 94.7 million. That's a hidden ulcer that nobody seems to care much about. After the recovery of the US economy, it turned out the jobs that were "won back" are mostly the lowly paid, low-qualification ones, while the median income is still far from recovering to pre-crisis levels.
Not only that, but there's been a serious conflict with the Chinese companies in the steel industry lately, now cheap Chinese steel flooding the market and causing serious concern amidst the US players in the sector. More and more critical voices are being heard against the free-trade agreement that the US is negotiating with the EU and the one that was already signed with the Pacific countries, because those could suck out the air off the US job market.
The US has lost a total of 5.7 million manufacturing jobs between 2000 and 2010, those companies preferring to invest in countries with cheaper labor. Last month, Jeff Immelt, the General Electric CEO gave a speech at the Stern School of Business, where he summarized the overwhelmingly prevalent sense of instability not just among the workers but at the top management levels in the companies. It's a volatile global situation, he said, the most unstable he had ever seen. There's lack of trust in the big companies, and the governments and global institutions are failing to meet the challenges of the day, and globalization is being under fire like never before.
These impressions are not just a US thing, they're growing in Europe too. In result, the accumulating economic insecurity is fueling skepticism toward free trade and globalization. The problems of the global economy are more than a few: slow trade, weaker demand, investment drought, plus over-production and geopolitical conflict. The whole picture doesn't look good. And that makes the playing with protectionist rhetoric and populism an expected consequence. Problem is, we've watched this movie before - and the results ain't that pretty, from what we've seen.
An obvious example is the Great Depression. When Hoover became president in 1929, he funded 12 regional banks, aiming to provide beneficial loans to farmers. But this quickly led to over-production and plunging prices. In result, the farmers demanded higher tariffs on imports, so in 1930 the Senate approved the Smoot-Hawley Tariff Act. Initially, it was meant to protect US farmers, but then it started to get applied in many other industries as well. It allowed the customs tariffs of 20 thousand imported goods to rise by almost 50%. America's trade partners were swift to respond with tariffs of their own, and this additionally squeezed the already narrowing world trade lifeless. In the end, the US farmers lost a total of 1 billion dollars through missed profit, and the US exports sank down to 1.7 billion in 1933, compared to 5.2 four years earlier. A classic example of good intentions backfiring pretty badly.
Today the US steel industry is in the role the farmers had back then. The calls for protectionism are mounting. In 2014, the global steel production reached a record level of 1.66 billion tons, and the prices fell under 400 dollars a ton in 2015. In result, the US companies who use steel in their production amassed vast quantities of it. But then the US steel producers responded by demanding higher tariffs on imported steel. And they got them.
China stands accused of unfair trade tactics, as it's subsidizing the sector very hard, making its production much cheaper than that of their competitors around the world, and undermining the steel prices on the global market. The Chinese steel exports surged by 21% last year, which also suppressed prices. Last month the US increased the cold steel tariffs 5 times, so now they're 256.4%. And still, no matter if Hillary or Trump becomes president, the trade war looks imminent. Just a few days ago the US international trade committee allowed the country's largest producer, US Steel, to go on with its legal battle demanding a ban on all steel imports from their Chinese competitors. They claim a few Chinese steel producers and their sister companies in the US had been working as a cartel, and stolen a few industrial secrets from them. Naturally, China is now threatening with retaliatory measures.
So the conflict is escalating into protectionist actions, which will suck more industries into the skirmish, which in turn will grow into a full-scale trade war, the long-term losers being everybody around. The thing is, more than half of the imports are raw materials (like steel), plus machine parts, machines, equipment, which the US companies need for their production. If those materials and euipment become more expensive because of the tariffs, the expenses would skyrocket, the US producers would lose their competitiveness, relinquish much of their market share, say goodbye to their current sales rates, and eventually start bleeding jobs.
Trump's election talking-points show that he's not afraid to engage into such sort of warfare. He's threatening the entire Chinese imports (not just steel) with a 45% tariff, the Mexican one with 35%. But this means it won't be China or Mexico who'll pay the bill eventually, but the American people - through tax hikes, price hikes, and diminishing incomes because of rising unemployment. Doesn't seem like the best way to make America great again, does it?
Hillary at least seems more reluctant to embrace such a scenario. Earlier this month she said she does understand the Americans' concerns about the trade agreements, and she shares those concerns, but a trade war is something else. She said America had tried that road in the 30s, and it only prolonged and deepened the Great Depression. So that's a bit encouraging, coming from her.
Except, it remains unclear what she'd do about the US trade policy on the steel sector. She said she's against the Pacific trade agreement, but the Department of State still refuses to disclose her correspondence with the US trade envoy regarding the preparation of that agreement from the time she was Secretary of State - not until the election has passed. Very convenient indeed. This move is definitely not in Hillary's favor, and many are doubting she'd turn her back to her (mildly) protectionist rhetoric, once/if she gets into office. The very fact that she needs to maintain that stance right now shows how discontent a large chunk of the Americans are about the current state of affairs. We can often hear accusations about America's big trade deficit, which is perceived as the bane of domestic industrial production and the labor force. Some proposals for dealing with this problem have included imposing VAT on imports while keeping it off exports, or looking for ways to devalue the dollar, or putting more requirements to companies who want to move their production overseas.
On the other hand, trade deficit could be viewed another way. From an economic standpoint, it's not the countries that trade, it's the individual consumers and companies. When the US consumers and companies buy more Chinese stuff than the Chinese buy American stuff, the trade deficit is a fact, granted. But it's not necessarily a "loss", because it's based on millions of individual purchases and sales which are done through mutual consent of buyer and seller. The dollars that China earns through that trade are quickly returned to the US in the form of capital, which is then used to buy financial assets such as bonds, property, bank deposits, etc, and through foreign investments in the US industry. This means the negative trade balance is compensated by a surplus in foreign investment which tends to lift the economy. So, even if imports are bigger than exports and that puts pressure on some sectors and jobs, the real question is if the losses from protectionism would exceed those effects in the long run.
As Robert Samuelson wrote for the Daily Journal, the fact that globalization has its flaws doesn't mean its substitution with nationalism is the better solution. It would limit the capability to maintain low prices of traded goods and services. It would bring more trade conflicts because more countries would start rooting heavily for their local firms through more subsidies and more protectionism, and this would clog many economies, the US one most of all. By the way, if Hillary is elected and still goes ahead and ratifies the TPP, she might opt to justify her decision with the argument that the agreement is actually meant to isolate China, which isn't part of it. And that would of course still reek of blatant populism, because it would be based on the premise that trade with China is necessarily against America's interests.
The turn toward isolationism and protectionism would trigger a wave of retaliatory steps across the world. A much more efficient solution would be if the next US president, whoever they are, keeps negotiating fairer trade rules with America's partners/rivals. Rules that would be valid for everybody, including China. Especially China. As Jeff Immelt said, the political discord we're now seeing in the US is mostly due to slow economic growth and the income inequality that it creates. And the problem won't go away through bureaucracy - it needs leaders who want real change. Without such smart leaders, the gradual isolation behind walls, barriers and tariffs would grow from a mere nuisance into yet another dire risk in an international economic (and hence, political) situation that's already looking pretty bleak.
In short, the main reason for a freshly renewed protectionism schtick is that more and more US workers are worried they could lose their jobs if the trade agreements with other parts of the world kick in, and cheap stuff from China starts undermining the US economy. The presidential candidates, in turn, are tempted to play by that tune and use it in their favor to garner support and earn votes. Doubtless, Trump is more extreme in his statements than Hillary. He has turned the debate on free trade into one of the pillars of his campaign, hurling numerous tough utterances against China, Mexico and Japan, and proposing a 45% tariff on all Chinese goods. But Hillary is not too far behind, either. She has said she doesn't support TPP, although just a few years ago while she was Secretary of State, she called it the "gold standard" of trade agreements. This "evolvement" of hers shows that the popularity of open economy and market is dwindling. And that's a rather risky tendency in the current situation, where the global economic growth remains way below the pre-2008 levels (this year's WB forecast is for 2.4%), and the G-7 leaders still can't come up with a way to bolster it.
If we look at the data, it would appear the Americans don't have much to rant about regarding employment. After the dip in the crisis years ('09-'11), unemployment started to go back down and reached 5.3% last year. A rate that many European countries could only dream about. But under the surface, the situation is not as good, given the fact that the US Bureau of Labor Statistics only tracks those who've actively sought jobs for the past 4 weeks. The latest labor data shows that last month, hiring new employees has sharply plummeted, and many analysts explain this with the fact that many Americans have actually given up looking for a job.
The number of Americans who don't even feature in the stats as part of the work-force (be it because they're still in school, or they've just stopped looking) is nearly 94.7 million. That's a hidden ulcer that nobody seems to care much about. After the recovery of the US economy, it turned out the jobs that were "won back" are mostly the lowly paid, low-qualification ones, while the median income is still far from recovering to pre-crisis levels.
Not only that, but there's been a serious conflict with the Chinese companies in the steel industry lately, now cheap Chinese steel flooding the market and causing serious concern amidst the US players in the sector. More and more critical voices are being heard against the free-trade agreement that the US is negotiating with the EU and the one that was already signed with the Pacific countries, because those could suck out the air off the US job market.
The US has lost a total of 5.7 million manufacturing jobs between 2000 and 2010, those companies preferring to invest in countries with cheaper labor. Last month, Jeff Immelt, the General Electric CEO gave a speech at the Stern School of Business, where he summarized the overwhelmingly prevalent sense of instability not just among the workers but at the top management levels in the companies. It's a volatile global situation, he said, the most unstable he had ever seen. There's lack of trust in the big companies, and the governments and global institutions are failing to meet the challenges of the day, and globalization is being under fire like never before.
These impressions are not just a US thing, they're growing in Europe too. In result, the accumulating economic insecurity is fueling skepticism toward free trade and globalization. The problems of the global economy are more than a few: slow trade, weaker demand, investment drought, plus over-production and geopolitical conflict. The whole picture doesn't look good. And that makes the playing with protectionist rhetoric and populism an expected consequence. Problem is, we've watched this movie before - and the results ain't that pretty, from what we've seen.
An obvious example is the Great Depression. When Hoover became president in 1929, he funded 12 regional banks, aiming to provide beneficial loans to farmers. But this quickly led to over-production and plunging prices. In result, the farmers demanded higher tariffs on imports, so in 1930 the Senate approved the Smoot-Hawley Tariff Act. Initially, it was meant to protect US farmers, but then it started to get applied in many other industries as well. It allowed the customs tariffs of 20 thousand imported goods to rise by almost 50%. America's trade partners were swift to respond with tariffs of their own, and this additionally squeezed the already narrowing world trade lifeless. In the end, the US farmers lost a total of 1 billion dollars through missed profit, and the US exports sank down to 1.7 billion in 1933, compared to 5.2 four years earlier. A classic example of good intentions backfiring pretty badly.
Today the US steel industry is in the role the farmers had back then. The calls for protectionism are mounting. In 2014, the global steel production reached a record level of 1.66 billion tons, and the prices fell under 400 dollars a ton in 2015. In result, the US companies who use steel in their production amassed vast quantities of it. But then the US steel producers responded by demanding higher tariffs on imported steel. And they got them.
China stands accused of unfair trade tactics, as it's subsidizing the sector very hard, making its production much cheaper than that of their competitors around the world, and undermining the steel prices on the global market. The Chinese steel exports surged by 21% last year, which also suppressed prices. Last month the US increased the cold steel tariffs 5 times, so now they're 256.4%. And still, no matter if Hillary or Trump becomes president, the trade war looks imminent. Just a few days ago the US international trade committee allowed the country's largest producer, US Steel, to go on with its legal battle demanding a ban on all steel imports from their Chinese competitors. They claim a few Chinese steel producers and their sister companies in the US had been working as a cartel, and stolen a few industrial secrets from them. Naturally, China is now threatening with retaliatory measures.
So the conflict is escalating into protectionist actions, which will suck more industries into the skirmish, which in turn will grow into a full-scale trade war, the long-term losers being everybody around. The thing is, more than half of the imports are raw materials (like steel), plus machine parts, machines, equipment, which the US companies need for their production. If those materials and euipment become more expensive because of the tariffs, the expenses would skyrocket, the US producers would lose their competitiveness, relinquish much of their market share, say goodbye to their current sales rates, and eventually start bleeding jobs.
Trump's election talking-points show that he's not afraid to engage into such sort of warfare. He's threatening the entire Chinese imports (not just steel) with a 45% tariff, the Mexican one with 35%. But this means it won't be China or Mexico who'll pay the bill eventually, but the American people - through tax hikes, price hikes, and diminishing incomes because of rising unemployment. Doesn't seem like the best way to make America great again, does it?
Hillary at least seems more reluctant to embrace such a scenario. Earlier this month she said she does understand the Americans' concerns about the trade agreements, and she shares those concerns, but a trade war is something else. She said America had tried that road in the 30s, and it only prolonged and deepened the Great Depression. So that's a bit encouraging, coming from her.
Except, it remains unclear what she'd do about the US trade policy on the steel sector. She said she's against the Pacific trade agreement, but the Department of State still refuses to disclose her correspondence with the US trade envoy regarding the preparation of that agreement from the time she was Secretary of State - not until the election has passed. Very convenient indeed. This move is definitely not in Hillary's favor, and many are doubting she'd turn her back to her (mildly) protectionist rhetoric, once/if she gets into office. The very fact that she needs to maintain that stance right now shows how discontent a large chunk of the Americans are about the current state of affairs. We can often hear accusations about America's big trade deficit, which is perceived as the bane of domestic industrial production and the labor force. Some proposals for dealing with this problem have included imposing VAT on imports while keeping it off exports, or looking for ways to devalue the dollar, or putting more requirements to companies who want to move their production overseas.
On the other hand, trade deficit could be viewed another way. From an economic standpoint, it's not the countries that trade, it's the individual consumers and companies. When the US consumers and companies buy more Chinese stuff than the Chinese buy American stuff, the trade deficit is a fact, granted. But it's not necessarily a "loss", because it's based on millions of individual purchases and sales which are done through mutual consent of buyer and seller. The dollars that China earns through that trade are quickly returned to the US in the form of capital, which is then used to buy financial assets such as bonds, property, bank deposits, etc, and through foreign investments in the US industry. This means the negative trade balance is compensated by a surplus in foreign investment which tends to lift the economy. So, even if imports are bigger than exports and that puts pressure on some sectors and jobs, the real question is if the losses from protectionism would exceed those effects in the long run.
As Robert Samuelson wrote for the Daily Journal, the fact that globalization has its flaws doesn't mean its substitution with nationalism is the better solution. It would limit the capability to maintain low prices of traded goods and services. It would bring more trade conflicts because more countries would start rooting heavily for their local firms through more subsidies and more protectionism, and this would clog many economies, the US one most of all. By the way, if Hillary is elected and still goes ahead and ratifies the TPP, she might opt to justify her decision with the argument that the agreement is actually meant to isolate China, which isn't part of it. And that would of course still reek of blatant populism, because it would be based on the premise that trade with China is necessarily against America's interests.
The turn toward isolationism and protectionism would trigger a wave of retaliatory steps across the world. A much more efficient solution would be if the next US president, whoever they are, keeps negotiating fairer trade rules with America's partners/rivals. Rules that would be valid for everybody, including China. Especially China. As Jeff Immelt said, the political discord we're now seeing in the US is mostly due to slow economic growth and the income inequality that it creates. And the problem won't go away through bureaucracy - it needs leaders who want real change. Without such smart leaders, the gradual isolation behind walls, barriers and tariffs would grow from a mere nuisance into yet another dire risk in an international economic (and hence, political) situation that's already looking pretty bleak.