U.S. elections are always a matter of concern and speculation in world markets. This year's presidential election is being watched with even greater alarm, given that both of the major party candidates are tapping into a protectionist sentiment unrivaled since the 1980s when America's economic doldrums were mistakenly placed at the foot of Japan.
Donald J. Trump's nomination as the presumptive GOP candidate has come amid global alarm that the openly protectionist candidate will launch a series of anti-free trade initiatives if elected. The prospect of Mr. Trump's victory is viewed with extreme concern in the global market. So far, Mr. Trump's campaign, once matched on the left by the equally protectionist Bernie Sanders, has generated more heat than light on economic challenges and their eventual resolution. Hillary Clinton, whose husband signed NAFTA, has also tacked into the protectionist sinkhole, especially in rust belt states with declining incomes and heavy job losses.
Mr. Trump has had great success among marginalized segments of the U.S. electorate that believe a seemingly stagnant economy is the result of “bad trade deals” and a flood of immigrants. The analysis of the U.S. economy is beyond our scope, but one thing is certain: many of the job losses in manufacturing and other industrial sectors are more the result of technological advances than either trade or immigration.
Machines, not Mexicans, are primarily responsible for the loss of steel, auto, and many other 20th century-economy jobs. Lower costs overseas have undoubtedly proven a competitive advantage, but no competent economist would propose either lowering wages for American workers or scuttling the technological improvements that have actually increased manufacturing output while lowering costs in the name of some reactionary renaissance of U.S. blue collar jobs.
Mr. Trump's rejection of trade agreements such as NAFTA, coupled with his less than civil condemnation of Mexicans, has sent chills throughout the Western Hemisphere.
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| Donald Trump |
After all, NAFTA is but a prototype for such trade pacts as the Pacific Alliance, an open market involving Chile, Colombia, Mexico, and Peru. The focus of these, the most prosperous of the Latin American economies, is ever growing ties to U.S. and global markets. These agreements have provided new markets and investment options, but more importantly have supplied an all important measure of competition and innovation in what were once protected economies languishing from wasted efforts and resources. The growing middle classes in these market-oriented economies are today and tomorrow's consumers of U.S. software, computers, telecommunications, financial services, automobiles, airplanes and other outputs.
Locking out Latin America goods, as part of some Trump-inspired renegotiation of trade deals, would devastate many Western Hemisphere economies already aching from the drop in commodity prices. China, which accounts for a growing portion of trade with Latin America and the Caribbean, remains only a fraction of the trade these nations enjoy with the United States. U.S. goods and services trade with Latin America, for instance, totaled $1.8 trillion in 2014. By comparison, total China-Latin American trade amounted to $112 billion in exports to China (2.0 percent of regional GDP) mostly in commodities, and $145 billion in imports from China (or 2.5 percent of Latin Americana and Caribbean GDP), mainly manufactured goods and refined petroleum.
For historic and geographical reasons, American investments and trade have had a longer and more intricate relationship with southern neighbors. Fighting trade wars would have a negative impact on U.S. exports as well as imports of commodities and raw materials.
For a country such as Mexico, whose largest market is its northern neighbor and whose share of foreign direct investment has generated its most productive expansion for decades, Mr. Trump's articulated claims that he will slap 35 and 45 percent tariffs on outsourced manufacturing would be nothing less than a nightmare.
If illegal migration is considered a current problem, one needs only to speculate about the effect of maquiladoras, calling centers, and other manufacturing plants shutting their doors south of the border. In the past few years, migration to the U.S. has abated, in part due to sluggish U.S. economic growth but also due to greater job opportunities in Mexico itself. A trade war on Mexican imports would have catastrophic consequences for the U.S.
Of course, Mexico also fears that a clamp down on illegal immigrants, as proposed by Trump, would stem the flow of over $24 billion in annual remittances to family members. According to one Forbes article, “That's more than Mexico's economy brought in from oil revenue and is nearly half of what a country the size of Brazil brings in from foreign direct investment (FDI).”
The larger threat is an indiscriminate trade war with China, which would have further devastating effects on both the U.S. and global economy. China's trade surplus, the source of much ignorant clamor, is viewed by Trump supporters as the losing end of a zero sum game. In fact, China's manufacturing outputs are delivered to U.S. ports, lowering prices and raising the purchasing power of American consumers in exchange for dollars.
China's vast holding of dollars, in turn, helped to fund U.S. national debt in the last decade, and its purchase of U.S. Treasuries help keep interest rates low. The dollars themselves are redeemed by purchasing U.S. goods and services. Airplanes, automobiles, computers, academic institutions, and innumerable other high tech and high wage jobs in these industries receive those dollars, creating a strong and vibrant market for U.S. advantage in scientific, technological, engineering and mathematics-based production. Not to mention the enormous U.S. financial services sector. A trade war would severely harm America's considerable advantage in producing in those sectors.
Far from a discussion on the need to reform America's educational system, a vestige of the mass production era increasingly less adapted to the new information economy, this year's political debates center on a romanticized vision of lunch bucket jobs concentrated around polluting factories and foundries. That's the “again” in making America great again. A real debate might include how to transform education and promote inclusion into the new economy. Instead resentment and anger is turned on immigrants and foreigners.
Much of the protectionist blather is symptomatic of classic zero-sum thinking and policies. The consequences of such policies are to profoundly “cut your nose off to spite your face.” During election campaigns, the unintended consequences of a fallacious economic policy are too complex for a two-minute sound bite or a bumper sticker. It is far easier to place blame for things on immigrants or foreigners – neither of whom vote.
