Trump and the Perils of Protectionism: Averting an Economic Disaster

On January 20, 2017, Donald Trump will take office as president of the United States after winning election on an unapologetically protectionist platform. With regard to the Trans-Pacific Partnership—vigorously pursued by President Barack Obama and signed by all 12 negotiating parties—Trump has promised to “issue a notification of intent to withdraw” from the agreement “on day one” of his presidency. During the election campaign, he threatened to slap punitive tariffs on imports from Mexico and China. The avowed purpose of this agenda is to “bring jobs and industry back on American shores” and rebuild the US economy.

Unfortunately, Trump is gravely mistaken about the impact of such policies. Assuming he is able to put his protectionist agenda into effect—which could prove difficult in the face of resistance from mainstream Republicans and powerful business interests—it is almost certain to take a heavy toll on the US economy, as well as on Japan and the rest of the world.

Impact of Scrapping the TPP

Washington took the initiative in pursuing the Trans-Pacific Partnership, cognizant that it would benefit the multinational corporations that have powered US economic growth in recent years. The TPP goes beyond the free trade agreements that have been negotiated to date. In addition to extending liberalization to more markets, it establishes behind-the-border rules to level the playing field in such areas as intellectual property rights, electronic commerce, state-owned enterprises, and government procurement. Such rules are considered vital to the regional and global expansion of business investment in the twenty-first century.

But the merits of the TPP extend beyond US businesses. The 12 parties (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, Peru, the United States, and Vietnam) negotiated for five and a half years to reach an agreement expected to benefit all the participating countries. Locally, the opening of markets to free trade will hurt certain industries, resulting in a loss of jobs, and this appears to be Trump’s focus. But when one weighs the long-term costs and benefits of the TPP, the United States comes out a big winner.

Business competitiveness in the twenty-first century is all about the value chain: the sum total of processes that go into making and delivering any given product (goods and services alike). Increasingly, these processes are scattered among different countries and regions, and the challenge for multinational corporations is to combine and manage them for maximum efficiency.

The TPP creates a mega-regional framework designed to facilitate the construction and management of such global value chains. In this sense, it is viewed as a pioneering agreement that provides a model for future FTAs. If it becomes binding, it will constitute a major step toward the development of a more advanced and efficient international trade and investment regime. In this sense, abandonment or delay of the TPP would be a major setback, not only for the 12 parties to the agreement but for the entire world.

Protectionism’s Dangerous Allure

Even more troubling than Trump’s promise to halt progress on this front is his apparent willingness to embrace out-and-out protectionist measures, as seen in his threat to impose a 35% tax on certain imports from Mexico or to designate China a currency manipulator and punish it with a 45% tariff.

Surely past experience should have taught us the perils of protectionism. After the Great Depression set in in 1929, industrial countries moved to shield domestic jobs from imports by raising their tariffs and devaluing their currency. These beggar-thy-neighbor policies led to a drop in the volume of world trade and exacerbated domestic woes as exports fell off and production dropped further. Desperate for a way out of this economic morass, Japan invaded China and Germany invaded Eastern Europe to secure markets for their products. Protectionism, in other words, was an important factor leading to World War II. Unfortunately, Donald Trump seems to have missed this basic lesson of twentieth-century history.

What will happen if the new US administration makes good on Trump’s threats to unilaterally impose punitive tariffs? First, prices of imported goods will jump, pushing up the cost of living. The main casualties will be the consumers, with low-income households suffering disproportionately. Domestically, this could fuel social unrest by exacerbating income inequality and heightening racial tensions.

Meanwhile, the countries targeted for high tariffs will in all likelihood retaliate with tariffs of their own. True, they may first appeal to the World Trade Organization, which would doubtless rule Trump’s tariffs illegal. But in that event, Trump has threatened to pull out from the WTO entirely.

The nations of the world have worked for seven decades under US leadership to build an international regime dedicated to preserving free and fair trade and ensuring the orderly resolution of trade disputes. Threats to bring that system crashing down are the last thing one expects or wants to hear from the next president of the United States.

Protectionist policies will certainly not strengthen American industry. While they may save some jobs over the short term, the effect will be transient, and the ultimate outcome could be disastrous.

No Need to Abandon the TPP

Whether the United States withdraws from the TPP remains to be seen. But we should bear in mind that there is no deadline for ratifying the agreement. It may take time, but I am hopeful that Trump will modify his position, as mainstream Republicans, business leaders, and some of his own advisors make their case for the TPP.

Congressional Republicans have traditionally supported free trade, and as the 2018 midterm elections approach, they may call on Trump to pursue liberalization policies vital to US business interests or even to negotiate a more advanced TPP.

With this possibility in mind, the other 11 parties to the TPP should move quickly to ratify the agreement in hopes that the United States will eventually come around. Since the final agreement was signed, a number of other countries have shown an interest in participating, including Indonesia, the Philippines, South Korea, Taiwan, and Thailand. We need to present a united front, showing that the rest of us are prepared to enter into a binding agreement at any time, while stressing the downside of allowing the agreement to languish unenforced.

RCEP: Holding Out for a High-Level Agreement

The TPP is not the only Asia-Pacific economic agreement in the works. China is said to be particularly interested in the Regional Comprehensive Economic Partnership spearheaded by the Association of Southeast Asian Nations, and negotiations are now underway between the ASEAN countries (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam) and the six states with which ASEAN has existing FTAs (Australia, China, India, Japan, South Korea, and New Zealand). As the outlook for the TPP grows dimmer, the RCEP is receiving more serious attention. Faced with the prospect of a mega-regional FTA that includes China and excludes the United States, Trump is likely to see the drawbacks of such an arrangement and recognize the importance of the TPP.

How should Japan proceed under the circumstances? The first step was to ratify the TPP, which the National Diet did on December 9. Where RCEP talks are concerned, Japan may not be in a good position to seize the initiative, but it needs to be actively involved in negotiating a high-level agreement that covers e-commerce, liberalization of government procurement, and other rules to ensure a nondiscriminatory climate for trade and investment.

The RCEP has the merit of providing a single overarching framework for the Asian region. In this context, Japan should ally itself with countries like Australia, New Zealand, and Singapore, which have similar interests, and push for a high standard of liberalization along with a new generation of trade and investment rules.

The problem here is that a number of the negotiating parties are at a much earlier stage of development. Realistically, countries like Cambodia, Laos, Myanmar, Vietnam, and even India cannot be expected to accept immediate, across-the-board liberalization and rulemaking at the level sought by highly industrialized countries like Japan. To prevent negotiations from breaking down over such differences, we will need to incorporate some flexibility in the agreement, as by building in a grace period for less developed nations.

Importance of Domestic Reform

For Japan, the TPP offered the promise of a new engine of economic growth at a time when the old engines had ceased to provide the necessary lift. As such, it figures prominently in Prime Minister Abe Shinzō’s new growth strategy. If the government has reason to doubt that the TPP will not come into force anytime soon, it is only natural for it to pursue an alternative, such as the RCEP or a Japan-EU economic partnership agreement. If we are going to have to chart a new course in trade, we need to find other frameworks that can at least partly make up for that loss.

This is just one more reason to continue opening our own market to agricultural imports. This is the sector that other countries have eyed for years. Clearly, Japan must open up its own markets if it hopes to persuade other countries to open theirs. In this sense, better access to overseas markets is inextricably tied to domestic reform. Japan has gradually moved to restructure its farm sector, but progress has been slow, and much remains to be done. In this era of global uncertainty, we must continue to press ahead with domestic reform.