Why Trump’s Protectionist Ideas May Not Work – Analysis


By Jayshree Sengupta

The father of economics, Adam Smith, believed in free trade and advocated it in the 18th century England. Most American presidents in the past believed and practiced it too. Trump is planning to reverse it for the ‘good of American people’ because as he said in his election campaign he wants jobs to come back to the US by blackballing Chinese imports.

He may however not take the drastic step of imposing 45 percent punitive tariffs on China, but he will probably not endorse the North American Free Trade Treaty Agreement (NAFTA) between Canada, Mexico and the US. After the treaty was signed in 1993, many US and Canadian industries moved to Mexico to take advantage of cheap labour. Recently, the President-elect forced Carrier, the makers of Air conditioners, to move back its plant from Mexico to the US (Indiana) saving some 1000 jobs.

Unfortunately, it is too late for Trump or anyone else in the world to reverse globalisation. Today capital can move freely between countries and a product in America can have components made in all parts of the world and not only in China. China itself is facing rising labour costs and is currently outsourcing the manufacture of parts from Vietnam and the Philippines which have relatively cheaper labour.

India is in China’s radar for outsourcing because of relatively cheap labour costs. It wants to increase investments in India. Indian textile and garment producers are outsourcing their products in Bangladesh because of cheap Bangladeshi (mostly women) labour which is skilled. All over the world, outsourcing is going on and to the extent that product parts are made outside the country, it will mean some jobs will be lost.

Even if India wants, nobody will favour a reversal of globalisation today. India has championed freer trade and has been very generous to its neighbours and has reduced tariffs on all products while the countries of SAARC still maintain long negative lists banning many product imports and imposing high duties on several items.

Fear of free trade comes from falling competiveness and fear of job losses. When India was protectionist till 1991, there was a craving for imported consumer goods. The government’s fear was that if imports were allowed, people would spend more on them than on domestic goods for which demand would fall and the industries would perish. While many economists like Jagdish Bhagwati were vehemently against the government’s protectionist policies and argued that exports would also suffer if there is a restriction on imported parts and embellishments, the quota tariff raj continued — though in the 1980s, attempts at liberalisation of imports were made strongly. But even now under Modi’s regime, certain restrictions have been placed on imports of agricultural goods against the wishes of the WTO. This is because India has to protect its farmers from being exposed to dumping of cheap agricultural products from countries which heavily subsidise their agriculture. Hence there is no country which is actually practising complete free trade according to text book tenets.

US however is the most open country trade-wise. As a result, it is the marketplace of the world. Every country tries hard to sell to the US and with China, it has a huge trade deficit of $345 billion. The high tariffs contemplated by Trump may help to reduce the deficit but will not be able to bring back the jobs.

There are many reasons for this. Factories in China are making products for the high end of the US market — designer outfits like Ralph Lauren jackets. They sell for over $300 in the US. Having visited the factory in China near Shanghai, making these jackets, I found out that their actual raw material plus labour cost was only around $30 to $50. How can fashion houses afford not to outsource from China when the margins are so high?

Recently in a report in The New York Times on a factory making recliner movie hall seats, the owner, who is currently doing well, said that costs would rise by 20 percent if high tariff was imposed on Chinese imports. Many of the parts came from the US but the fabric and a switch box that controlled the chair’s movement came from China. Also, if Trump succeeds with his protectionist policies, a number of multinational companies based in the US would shift to other countries where they can buy components at lower prices.

Around 34 percent of components in American manufacturing are coming from abroad. Also, when a high tariff is imposed on imported consumer goods, it cuts into total consumer spending as prices go up of such goods and will result in falling demand for American goods as well and will result in net loss of jobs.

It will affect countries in Europe which are selling manufacturing equipment or finished products like synthetic yarns to China. Thus it may affect adversely the manufacturing industries of Europe. Meanwhile, China is already in the process of shifting many of its manufacturing processes to Vietnam and Africa. They would be able to export from their new locations and evade the tariff and continue to remain competitive.

There are many places in the world, especially where you can still run sweat shops in which labour is paid poorly, working six days a week, 12 hours a day, and with no environmental standards. Laws can easily be flouted and human rights violated in these factories, but the end products are cheap and of good quality. Such labour force, willing to work in factories under stressful conditions, does not exist in the US any more, according to the American factory owners themselves.

Also, with the rapid advances in science and technology, robots and automation are replacing human hands in US manufacturing. Even if Trump manages to get many factories humming with activity again, it is unlikely that there will be a huge amount of job creation. Even if everyone may hate the Chinese as they take over markets all over the world and manage to take away jobs, their cutting edge technology, the discipline of the labour force and the resulting cost effectiveness is not something trivial and cannot easily be replicated either by the US or India so soon.

Observer Research Foundation

ORF was established on 5 September 1990 as a private, not for profit, ’think tank’ to influence public policy formulation. The Foundation brought together, for the first time, leading Indian economists and policymakers to present An Agenda for Economic Reforms in India. The idea was to help develop a consensus in favour of economic reforms.

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