The Implications of a Protectionist US Trade Policy

Tasks

When President Trump came into office the US administration launched a detailed analysis of American trade relations. It aimed to identify "unfair trade practices" that are supposedly increasingly being used by other countries, and that are destroying or threatening to wipe out "well-paid" American jobs. The political debate primarily focuses on the US' key regional trade partners Mexico and Canada, which have drawn the most criticism from the US administration. China and Germany's very high trade surpluses with the USA have also come under fire. In the case of China the US administration accuses it of implementing an unfair trade policy in the form of subsidies and, at the same time, of discriminating against US companies in China. Germany, by contrast, is criticised for its poor appetite for US products.

This study simulates potential protectionist trade policies on the part of the USA using historical data. The results permit a comprehensive assessement of the political debate and, above all, of its meaningfulness.

The study shows that the USA applies relatively low tariffs compared to its trade partners. At the same time, it is also clear that, alongside this liberal tariff policy, the USA has been running a high trade deficit in recent years, especially in goods trade. This macroeconomic imbalance can be seen with eight of the US' key trade parters.

The study clarifies that any isolation of the US market would have a negative impact ín all discussed scenarios in the long term, and especially on the US economy. Moreover, it shows that if the US were to implement a protectionist trade policy, this would be very likely to lead to a worldwide retaliation policy. The potential economic damage would once again be particularly negative for the USA in such a scenario.

The study illustrates that the USA does actually face economic imbalances, and especially high trade deficits, which are increasingly causing resentments in individual branches within the USA. At the same time, however, the study also makes it clear that the solution to such economic challenges does not rest in a protectionist trade policy. On the contrary, such a policy would only exacerbate problems in the long term.

Methods

CGE model
Structural gravity equation.

Data sources

Trade data (UN Comtrade)
Tariff data (WITS database).

Results

The study yields a clear policy recommendation: namely that the USA should not persevere with its threat to implement a protectionist trade policy for its own sake. At the same time, seeking a new form of cooperation with its key trade partners like China, Germany and other NAFTA members would be a far more sensible strategy. First steps in this direction have been taken, for example, by founding a"Global Forum" on the worldwide reduction of steel overcapacities and dumping. Such new cooperation platforms will be increasingly necessary and would also offer existing international institutions like the WTO important new remits.

The USA is the architect of the global, rule-based, multilateral trading system. The country has systematically promoted the three pillars of the international economic system - the World Bank, the Monetary Fund and the World Trade Organisation. It is time for the world's other leading industrial nation to support the USA in its endeavours in order to avoid a turnaround in global free trade. Responsibility for this task particularly falls to the beneficiaries of post-war US policy like Germany, Europe and Japan.

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