The Financial Express

Trump: The dark shadow of protectionism

| Updated: October 22, 2017 12:55:18

Trump: The dark shadow of protectionism

Some people of Bangladesh are happy that Donald Trump has made it to the White House. Many of them belong to the business community and to those allied to them. One of the reasons for their support of Trump seems to be the fact that during the election campaign he had repeatedly asserted his strong opposition to the Trans Pacific Partnership (TPP) agreement that President Obama had very painstakingly negotiated with eleven Pacific Rim countries during his two terms in office. He had promised to scrap the agreement if elected, and true to his words it was one of the first executive orders he issued after assuming the Executive Office of the President of the United States (EOPOTUS or EOP). 
TPP was ostensibly an agreement for free trade to promote greater trade and investment among the signatories. The not-so-hidden agenda was to set up a pro-USA bulwark against the rising tide of Chinese influence. The populist politics currently sweeping across the USA holds free trade responsible for the decline of manufacturing jobs in the country. Many Americans are aggrieved that the USA has lost heavily from North American Free Trade Agreement (NAFTA) and other trade pacts that promote more open global economy. Trump pandered to this populism and promised to either abandon or renegotiate trade agreements it was a signatory to. 
It should be mentioned that the TPP never became a trade treaty; it was a proposal to promote trade and investment agreed upon by the negotiators of all twelve countries. In order that it could become operational as a treaty it had to be ratified by the legislature of each and every country, especially that of the USA.  There was little chance of it passing the Congress since members on both sides were worried about a popular backlash. The intensity of opposition to any new free trade treaty can be gauzed from the fact that even Hillary Clinton abandoned the TPP and promised not to pursue it if elected. In other words, TPP was a dead horse long before Trump occupied the White House, and his much-trumpeted executive order scrapping the TPP was largely symbolic. It will not have any impact on either the US economy or the world economy, which it would have had if it had become operational. 
The scrapping of the TPP greatly pleased the business community of Bangladesh because one of the signatories of the TPP was Vietnam, a country that is now the most competitive supplier of readymade garment (RMG) products to the USA. It exported insignificant quantities of RMG products to the USA until 2001 (only $47 million). But since then its RMG export to the USA exploded, and by 2015 its export stood at $10.4 billion worth of RMG products to the USA. In 2001 Bangladesh had exported $1.9 billion of RMG products to the USA and it increased to only $5.2 billion in 2015 (USITC data). This has happened despite the fact that Vietnam paid more in import duties than did Bangladesh. Obviously Bangladesh RMG manufacturers were worried about the pace of growth of export that Vietnam could achieve with lower (or zero) import duties if the TPP became a reality and the adverse consequences of that on the RMG export of Bangladesh. 
The capacity of Vietnam to monopolise the US apparel market is overstated.  Even at its peak, Chinese RMG export to the USA did not exceed 40 per cent of total US RMG import and Bangladesh achieved its success in the US apparel market at that time. The USA bought 12.2 per cent of its total RMG import from Vietnam (6.1 per cent from Bangladesh). The incremental RMG export of Vietnam to the USA was hardly more than a modest fraction of the incremental import of the USA except during the recessions. Even if Vietnam gets duty-free access into the US market and consequently attains a substantial increase in RMG export growth, it is unlikely to constrict the space of Bangladesh provided it remains competitive against other exporters. Business people often tend to view economic transactions as zero-sum game, which mostly they are not.  Vietnamese export growth should be the least of the worries of our RMG exporters.
A far greater worry should be why Trump ditched the TPP. The economic philosophy of Trump is aptly expressed by his election-time slogans: 'America first', and 'buy American and hire American'. This type of attitude, all too common, goes by the name of 'protectionism' in economics. Many countries succumb to the false premises of this dogma while searching desperately for quick solutions to complex economic problems in times of economic stress. 
The last time the USA resorted to protectionism was after the spectacular share market crash of 1929. The Smoot-Hawley Act of 1930, which massively raised tariffs on the trade partners and triggered a tariff war, eventually reduced export and import of the USA by more than half and rendered nearly one-quarter of the workforce unemployed. What could have been at worst a deep recession was turned into a horrific depression that lasted for a full decade and pulled down the entire western world with it. 
It is not at all clear how the USA will execute the tariff war that Trump is threatening against Mexico and China, given that all of them are members of World Trade Organisation (WTO). Assuming that it finds a way to do so, it will not be limited to them only. When the tariffs fail to yield the desired result, which almost certainly will be the case, more and more countries will be brought under the net. The consequent tariff and retaliatory counter tariff measures can only reduce trade as it did during the great depression. This could engineer an economic downturn that would affect not only the USA but also all countries of the world, especially its trading partners. There will be no prospect whatsoever of duty-free quota-free access in Trump's country, indeed even generalised system of preferences (GSP) facilities could be revoked. Bangladesh should be especially cautious since the USA is its largest export market. Furthermore, as a country that sells a great deal more to the USA than it buys from, Bangladesh might be targeted by the Trump administration in a similar manner it is targeting China. 
The USA accounts for one-quarter of the global output and one-seventh of the global import demand. It is arguably the most important player in global trade. Any turmoil in the US economy is bound to have adverse consequences on other countries, especially those who have significant trade relations with it. The real danger is that if Trump really goes ahead with his macabre war against globalisation, world trade will plummet and pull down the world economy. In this event, the total (and RMG) export of Bangladesh will suffer as it did during the 2008-09 global recession. The development strategy of the country is now predicated on export-led economic growth. Any prolonged stagnation of export will put that strategy in jeopardy, and the task of raising the living standard of the teeming millions from its miserable level will become correspondingly difficult. 
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