IMF: Stop With the Protectionism

Image result for protectionismA new IMF publication finds that “[t]he waning pace of trade liberalization over the past few years and the recent uptick in protectionist measures could be limiting the sustained policy-driven reductions in trade costs achieved during 1985–2007, which provided a strong impetus to trade growth (Evenett and Fritz 2016; Hufbauer and Jung 2016)” (pg. 63). Their suggestion? “[R]esisting all forms of protectionism and reviving the process of trade liberalization to dismantle remaining trade barriers” in order to “provide much-needed support for trade growth, including through possibly kicking off a new round of global value chain development” (pg. 86). The Wall Street Journal reports,

Rising protectionism, record debt levels and a continuing economic malaise in wealthy countries will drag on global growth next year despite a turnaround in several key emerging markets, the International Monetary Fund said Tuesday. Global growth should only marginally pick up in 2017 to 3.4% from 3.1% this year, the fund said in its latest World Economic Outlook, despite policy makers pushing central bank stimulus into uncharted territories…A political backlash against the perceived negative effects of globalization threatens to undermine an already-weak and precarious recovery, the IMF warned.

“Subpar growth at recent levels risks feeding on itself through the negative economic and political forces it is unleashing,” IMF chief economist Maurice Obstfeld said, referring in large part to the surge in trade barriers around the world and the rise in opposition to free trade and immigration in the politics of the U.S. and Europe. Fearful of a trend toward protectionism when the global economy is already struggling with deflation risks, the IMF highlighted the potential shocks to growth from a sudden increase in tariffs and other trade barriers.

…The IMF also took pains to caution policy makers against the temptation to revert to protectionism as trade growth stalls in the low-growth era. Such anti-trade trends risk tilting the world economy deeper into a long-term funk. The fund estimated that a surge in trade barriers around the globe that pushed up import prices by 10% could sap nearly 2 percentage points off world growth over five years, force a 15% decline in exports and pull investment down by more than 4%.

This makes the anti-trade rhetoric of politicians all the more frightening. For example, take Donald Trump’s ill-conceived anti-NAFTA stance, especially in regards to the automobile industry. The WSJ again:

U.S. automotive competitiveness is highly dependent on global free trade. According to the Mexico City-based consulting firm De la Calle, Madrazo, Mancera, 37% of the U.S.’s imported auto components came from Mexico and Canada in 2015. This sourcing from abroad is important to good-paying U.S. auto-assembly jobs. But parts also flow the other way. U.S. parts manufacturers sent 61% of their exports to Mexico and Canada in 2015.

This synergy has made the U.S. auto industry attractive for investment. In the aftermath of the 2008 financial crisis investment in the auto sector contracted. But from 2010-14 almost $70 billion was invested in the North American automotive industry. Mr. Trump claims that investment is going to Mexico but two-thirds of it went into the U.S., according to a January 2015 report by the Michigan-based Center for Automotive Research.

This investment dynamism helped generate 264,800 new U.S. jobs in motor-vehicle production and parts between January 2010 and June 2016, according to the Bureau of Labor Statistics. That’s a 40% increase in employment despite the increasing trend toward robotics in the industry. Shut down Nafta and these workers and future job seekers will pay.

The kind of protectionist rhetoric and policies we’ve seen in both Europe and the U.S. is worrisome to IMF managing director Christine Lagarde and World Bank president Jim Yong Kim, with Lagarde going so far as to call it “economic malpractice.”

Let’s hope these recent populist movements are just a blip amongst the increasing economic freedom worldwide.