Where will rising nationalist policies lead the global economy?

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World trade has slowed over the past few years. Net global exports declined to USD 15.8 trillion in 2016 from around USD 18.2 trillion in 2011, while imports also registered a drop to USD 16.1 trillion from USD 18.4 trillion over the same period. Total trade witnessed a contraction of 3% in 2016 compared to growth of about 20% in 2011. One of the reasons contributing to this slowdown is the increase in protectionist policies among advanced countries.[i]

With US President Donald Trump’s policies beginning to take shape, protectionism has come to the fore once again. International bodies like the International Monetary Fund (IMF) have become wary of rising protectionist trade policies, as seen in almost all their recent reports. Since taking office, Trump has pursued a number of protectionist measures, such as withdrawing from the Trans Pacific Partnership (TPP).[ii] This will directly impact US relations with Asian member countries in addition to disrupting the their economies. Withdrawal from the North American Free Trade Agreement (NAFTA), raising import tariffs, and implementing a controversial border adjustment tax are other measures the Trump Administration has hinted it may implement and which will have a direct consequence on many economies, particularly Canada and Mexico.

Since his first day in office, Trump has stressed putting ‘America first’, to include reducing the nation’s trade deficit. He has argued that the United States has suffered more due to free trade than it has benefitted. Free trade, he contends, has resulted in increased competition for local manufacturing due to an influx of cheaper goods, and has also led to job losses for the US citizens and lower wages. However, one must consider the benefits of free trade, which include cheaper goods and quality products for US consumers. International trade theories suggest that free trade helps bolster the comparative advantage of respective nations, in turn benefitting both sides. Whether we believe in Smith’s theory of Absolute Advantage (where a country produces only goods which it produces most efficiently and trades for others), or Ricardo’s theory of Comparative Advantage (according to which differences in technology and/or natural resources enable a country to produce a good more efficiently than the other), or the Hecksher-Ohlin theory of Factor Endowments (where a country will export only those goods which use the factor that is most abundant), or Viner’s  Specific Factors Model or the New Trade Theory (where specialization increases output and there are increasing returns to scale), all emphasize the mutually beneficial outcomes of international trade.

During early stages of industrialization, countries need to provide some kind of protection to their growing industries by way of higher import tariffs (the famous ‘infant industry argument’). However, what we are seeing now are emerging protectionist policies in advanced economies with well established industries, to which the argument of ‘infant industry’ does not apply.

Furthermore, raising tariffs will increase the costs of imported goods thereby increasing the cost of final goods manufactured in the United States that rely on foreign inputs. This in turn will make US goods less competitive, ultimately hurting domestic producers as well as consumers. And the resulting trade wars are likely to harm US exports and the national economy. Thus, increased tariffs are unlikely to yield any positive results. Moreover, if we examine the track record of increasing protectionism we find that it did not serve the purpose of supporting domestic growth, rather it led to trade wars, and thereby contributed to global economic slowdown. The Smoot Hawley legislation is a classic example.[iii] Passed in the mid-1930s it only added to the Great Depression. The United States substantially raised import tariffs that in turn led to the adoption of beggar-thy-neighbor policies by other countries in retaliation. The resulting trade war thus only worsened the United States and other countries’ economic activity, consequently contributing to overall global slowdown.

Anti-immigration policies

As with commercial policy, Trump’s nationalist and protectionist disposition have impacted US immigration policy. The temporary ban on premium H1-B visas has encumbered the ability for US companies to hire skilled foreign workers. This is going to have a disruptive impact on developing countries like India that are the origin of many such workers. However, it is worth mentioning that the migrants (who often bring their families along) also contribute to the US economy. Thus, revoking or placing restrictions on this visa will likely also negatively impact the US economy.[iv]

Likewise, Australia has also adopted anti-immigration policies, such as banning a popular visa scheme that had been in place since the 1990s. Skilled professionals, particularly in the IT sector—which includes many Indian nationals—will be adversely affected, as they were the biggest beneficiaries of this visa followed by the UK and China.[v] New Zealand has also prioritized its nationals by tightening its essential skills visa policy (i.e. work visa requirement).[vi] In a similar vein, Saudi Arabia recently prohibited the hiring of foreign dentists as well as foreign workers in shopping malls to boost employment opportunities for Saudi nationals. [vii]

President Trump’s protectionist policies have come amid intensified nationalist policies in other advanced economies. However, the recent French election, with the rejection of Marine Le Pen, an advocate of anti-free trade and anti-globalization, and the victory of pragmatic centrist Emmanuel Macron, suggests there are alternatives to protectionist policies. Thus in this new era of rising protectionism when global growth is already tepid, countries around the world should come together instead of engaging in trade wars. Increasing import tariffs and anti-immigration policies are not the solution to driving economic growth, which is better served by collaboration and coordination.


Notes

[i] World Trade Organization: “Short-term Trade Statistics”

 https://www.wto.org/english/res_e/statis_e/short_term_stats_e.htm

[ii] New York Times, “What Is TPP? Behind the Trade Deal That Died”, January 23, 2017

https://www.nytimes.com/interactive/2016/business/tpp-explained-what-is-trans-pacific-partnership.html?_r=0

[iii] The Economist, “The battle of Smoot-Hawley”,  December 18, 2008
http://www.economist.com/node/12798595

[iv] Firstpost, “H1-B visa restrictions: Experts say US too will feel the heat of Donald Trump’s plan”, February 1, 2017

 http://www.firstpost.com/business/donald-trumps-h1-b-visa-proposal-will-have-repercussions-for-the-us-too-say-experts-3240302.html

[v] South China Morning Post,” How Trump and Turnbull dealt A double whammy to Indian Techies”, April 24, 2017

http://www.scmp.com/week-asia/article/2089622/how-trump-and-turnbull-dealt-double-whammy-indian-techies

[vi] Financial Times, “New Zealand tightens work visa requirements to put Kiwis first”, April 19, 2017

https://www.ft.com/content/29205d22-8ed9-3ccc-b653-56deab33b238

[vii] Saudi Gazette, “No foreign dentists to be hired: Ministry”, May 10, 2017
http://saudigazette.com.sa/saudi-arabia/no-foreign-dentists-hired-ministry/
Also see http://www.thenational.ae/world/middle-east/malls-in-saudi-arabia-to-hire-only-locals

Photo credit: Wikipedia 

About Author

Disha Kheterpal

Disha Kheterpal is a contributor to the International Security Observer. Disha is an economist based out of India, currently working in Mumbai at the Economic Research Department of State Bank of India. She works on macro-economic analysis of India and other countries. Prior to this she worked as an economist in New Delhi at TAC Economics, a leading European Macroeconomic and Financial Research Consultancy, where she worked on emerging market economies’ country risk. She holds a Masters of Economics from Centre of Economic Studies and Planning, Jawaharlal Nehru University and a Bachelor’s degree in Economics from Delhi University. She is fluent in English and Hindi.

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