President Trump and his ultra-rich government have crudely appropriated some old ideas from progressive development economists. Of course, they don’t realize the clumsiness of their protectionist approach or its provenance. Progressive economists are not against free trade, but they recognize when there is exchange between two unequal nations, the weak one needs some form of protection against the powerful nation. For example, let’s assume Guyana still produced those very durable GRL refrigerators and wonderful gas stoves, do you believe they could have competed against cheap inferior Turkish and Chinese ones without some form of protection?
That is why progressive development economists have always recognized the right of weak countries to protect certain strategic manufacturing industries. As a matter of fact, during my CAPORDE days (Cambridge Advanced Programme for Rethinking Development Economics), Ha-Joon Chang once told me it is better to have an inefficient manufacturing sector than none at all. Ha-Joon and others understand the importance of having certain essential spill-over effects from manufacturing that commodity extraction and service-based industries will not provide.
However, economists of all background are aware of the harmful effects of a trade war among the large and powerful countries. Everyone loses, but the workers and consumers – from weak and powerful nations alike – stand to lose the most. The Trump people are playing victim as they try to legitimize a trade hustle. Their approach also projects supposed demons, namely brown and black immigrants (for the record, I don’t support illegal immigration) as part of the brew. Indeed, the mobilization strategy of fascists has always included demonizing a group of vulnerable people. This time around the supposed demons are the Mexicans and those undesirables from “shithole” countries. After all, why can’t we get more Norwegians? The answer, of course, has to do with the fact that Norway has a higher living standard and more humane society than the average American society, whose safety net has been pummeled by the corporate lobby, Supreme Court and the profit-only business motive. The profit-only motive shows up in automation, but weak immigrants get the blame. Those workers who are still lucky to have work do not enjoy the wage increases from the higher productivity automation brings.
The strategy of victimhood is exposed when one considers that the United States has the second largest manufacturing sector just after China’s. As at the end of 2017, Chinese manufacturing output was US$2 trillion while that of the United States was US$1.9 trillion. Japan and Germany account for the third and fourth largest manufacturing output, respectively. Japan’s 2017 production was US$1.1 trillion and Germany’s was US$700 billion. In terms of sophistication, the American manufacturing sector is second to none, making the most complex goods in the world ranging from cars, heavy machinery, robots, aircrafts, military hardware (protected by government sourcing) and many others.
Multilateral trade agreements have been successful in negotiating lower tariffs on manufacturing across the world. However, China has been slow to reduce tariffs on manufacturing goods, thus much of the criticisms by the Trump people of Chinese trade practices is understandable. The bigger problem has been agriculture. Most countries insist on maintaining protection for farmers, although minor progress was made on rolling back some agricultural export subsidies during the 2015 WTO negotiations. Food security and cultural reasons are often invoked by most countries for agricultural protection. American farmers, for example, are subsidized heavily. The E10 ethanol mandate in the United States has benefitted and enriched already wealthy corn farmers, but the food stamp and healthcare of the weakest are undermined mostly by people who go to church on Sundays. Readers might remember that I have called on numerous occasions for a similar mandate in Guyana to secure a guaranteed market for sugar-based ethanol. Sugar, of course, is a superior feedstock in terms of energy balance and Guyana has a surplus of fresh water.
Furthermore, the United States currently imposes a 25% tariff on the importation of light trucks, while it places 2.5% tariff on imported cars. Europe imposes a 10% tariff on American cars. The tariff on light trucks has been in place since the early 1960s when the European Common Market denied American chicken producers access to their market. The United States responded with a 25% tariff on the Volkswagen Combi-Bus that was selling very well in America at the time. Since then the 25% has remained on light trucks and minivans, resulting in Toyota and Honda setting up plants inside the United States to produce these lines. These days, both producers make a lot of efficient sedans, light trucks and minivans inside the United States. American automakers, such as Ford and General Motors, make their highest profit margins on light trucks and minivans.
A trade war among China, the United States, Canada, Europe and Mexico would have devastating effects for workers and consumers. For example, Toyota announced last week that the steel and other tariffs will cause a US$1800 price increase on the Camry, which itself is an interesting car. It is the best-selling car and made in Kentucky, United States. As a matter of fact, the Camry is often cited as one of the most American cars because it sources a large percentage of components from vendors inside America and is assembled there. This is a typical middle class car.
Since steel and aluminum are inputs into many manufactured goods like autos, building materials, fabricated goods, etc, we can expect higher prices for consumers. These businesses will also experience job losses as they seek to maintain profit margins. The exporting countries will also experience a decrease in demand for their exports. However, the protected industries in the United States will experience an expansion of production with a long lag if the protection remains. Consumers will have to pay higher prices for the goods coming from the protected sectors. World output will likely contract in the short and medium term, thereby increasing the chance of pushing the world into a global recession.
A global recession at this time would be very bad for Guyana and the Caribbean. This would result in a downturn of tourist arrivals, remittances and foreign direct investments. The oil price could fall, assuming no geopolitical shock, thus easing some of Guyana’s and the Region’s pain. Even when Guyana starts producing and exporting crude oil – for which the country will have to pay a marketing fee to ExxonMobil for selling Guyana’s share of profit oil – there will still have to be importation of gasoline and heavy fuel.
The net effect of a trade war would most likely be negative. The beneficiaries are a relatively small number of workers working in the protected sectors. Small economies like Guyana depend heavily on exports and imports of capital goods to drive economic growth. The steel and aluminum tariffs will increase the price of heavy machines used in the agriculture and mining sectors. There will ultimately be some slowdown in these sectors also, assuming this madness continues. The balance of payments position of both the Caribbean and United States could worsen.
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