Global sourcing trends

Rising US Protectionism – Testing Times for Global Economic Growth?

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After a decade of recuperation from the global economic crisis, today all the major economies of the world are growing together. Global economic indicators are showing positive trend with better stability. International Monetary Fund (IMF) in its ‘World Economic Outlook’ has estimated global output to have grown by 3.7% in 2017 which is half a percentage point higher than 2016. The global growth forecasts for 2018 and 2019 have been estimated at 3.9%. To a large extent, this momentum of growth has been attributed to the pumped-up government spending by the previous administration of the United States (US) and tax policy changes by the current administration. Meanwhile, entering into the ninth year of growth, US continues to push its protectionist measures and anti-immigration policies. Presently, the United States tops the protectionist position across the world with 1,085 protectionist measures, compared to India, the next highest, with 438.

What is Protectionism?

Protectionism refers to government actions and policies that restrict or restrain international trade, often with the intent of protecting local businesses and jobs from foreign competition. Typical methods of protectionism are import tariffs, quotas, government subsidies or tax cuts and direct state intervention. Protectionism can be useful in protecting domestic industries and domestic employment. It also encourages diversification of output as well as the prevention of dumping. Nevertheless, the side effects of protectionism on the country’s economy cannot be ignored. It eliminates the system of global competitive pricing which may force the end-consumers to pay more. It also wrecks vital relationship among countries resulting in a retaliatory reaction from each other.

Protectionism in the United States

America’s history indicates the Founding Fathers as promoters of protectionism, when they wanted to protect American industries from Britain. A prominent example of American protectionism was the Smoot-Hawley Tariff Act of 1930 to safeguard the US farmers from external agricultural products. US imposed one of the highest tariffs in the history, with duties on imported goods raised by 50%. This act had a devastating effect with the US imports falling from US$1.33 B in 1929 to US$390 M in 1932, and exports decreasing from US$2.34 B in 1929 to just US$784 M in 1932. World trade fell by 66% from 1930 to 1934 and eventually the US reduced the level of tariffs in 1934 with the Reciprocal Trade Agreements Act. The global economic environment then was far different from today’s state of affairs.

Moving on, the current US President Donald Trump started his protectionist policies by exiting the Trans-Pacific Partnership. The present US Government proposed some sweeping changes to the US trade and immigration policies and threatened to impose steep tariffs on imports. Recently, the US approved new tariffs on solar panels and washing machines. The US Government also passed the massive US$1.5 T tax overhaul into a law, the largest such overhaul since the 1980s, which slashed the corporate rate from 35% to 21%. It is also a known fact that the US administration is trying to redraw the North American Free Trade Agreement (NAFTA) in order to help the US workers, raise the employment rate, and bring American industry back to the country.

However, in the long run, as proven from history, these protectionist policies might cause more harm than good for the US. The new tariffs are immediately showing a negative impact on American consumers. Foreign companies are raising prices for their products and services. Goldman Sachs has forecasted a price increase of 8 to 20% on new washing machines. This damage to tariffs also spreads like an ailment to other corporations and industries, not just the one it directly impacts. The price for the American products would also go high in absence of global competitive pricing. In the same way, choosing to weaken or tear up NAFTA would probably not help American workers. Jobs in the US which were created out of the good relationship with Mexico would certainly suffer. These might further result in hindering the overall growth of the US economy as already predicted by the IMF in its World Economic Outlook that US growth would likely start weakening after 2022.

Effect of US Protectionism on Global Economy

Protectionism inescapably damages well-built relationships among trade partner countries. As of now, thriving global trade and economic growth have cushioned world markets against rising US protectionism policies. Countries whose economy is mostly dependent on export of goods or services to the US are going to be directly impacted by this. Their export will go down resulting in declined production, employment and income which will further affect the purchasing power of these countries. As a result, these countries’ import will also go down. Many countries would also strike back with their own protectionism polices. This might have a cascading effect among major economies of the world, causing another global economic slowdown.

Protectionism, despite such drawbacks, is still popular because of the myth that trade is a zero-sum game where if one gains, the other losses. On the contrary, trade is a win-win situation for all the partners involved. Today, amid increasing globalization, it is immensely doubtful that protectionism will prevail. This is true even in the US, where the recent federal government shutdown due to disputes over the Deferred Action for Childhood Arrivals (DACA) immigration policy shows the country’s low acceptance level towards such protectionist policies. It would also be too early to proclaim that the Trump administration has started a new era of protectionism, as most of the proposed protectionist polices are yet to be implemented as a law. Nonetheless, for firms with businesses present in multiple countries along with the US, it is advisable to closely monitor the policy changes and tax rates by the US and their possible effects, and to be prepared with a contingency plan to moderate the impact.

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