WASHINGTON D.C. — The trade policies of a country as powerful as the U.S. can have global repercussions, and Trump’s recent use of protectionism has come to threaten developing countries. Over the course of this year, Trump has put steep tariffs on steel and aluminum imports from Canada, Mexico and the European Union. Most recently, the president implemented 25 percent tariffs on $34 billion worth of Chinese imports.
Global Trade War
Each of these economies has retaliated with similarly steep tariffs that target American producers, effectively putting the U.S. at the center of a global trade war. In addition to tariffs, the Trump administration has backed out of the Trans Pacific Partnership (TPP) and is in the midst of renegotiating the North American Free Trade Agreement (NAFTA). However, the recent tariffs on America’s neighbors could complicate these negotiations.
Some analysts argue that there are no winners in a trade war. The tariffs and termination of trade deals will merely raise costs and limit choices for consumers, dampening economic progress around the world.
Protectionism’s Impact on Developing Countries
History shows that protectionism threatens developing countries and the global economy. The Smoot-Hawley Act of 1931 increased tariffs on around 20,000 imports by an average of 20 percent. It resulted in retaliation by the targeted countries, inciting a trade war, and global trade decreased by 67 percent.
The U.S. had another bought with protectionism in the 1970s and 80s. Several wealthy nations, including the U.S. implemented non-tariff barriers to trade. These included tighter restrictions on textiles and clothing, and subsidizing agricultural exports. Such actions decreased the ability of developing countries to export goods, especially agricultural products. As a result, many countries had limited ability to import the resources they needed.
Trade is especially important to the smaller economies of developing countries, so any restrictions could have devastating effects. The way protectionism threatens developing countries goes beyond the implicated sectors; it really affects use of resources and distribution of resources. In addition, protectionism limits foreign investment, which decreases growth opportunities.
Then after the global financial crisis, the U.S. implemented new trade restrictions. Between 2008 and 2010, one study found that 692 new trade barriers had been enacted, primarily by G20 members. This caused a significant decrease in global trade. But the resulting loss of trade was disproportionately felt by some of the poorest countries. Of the total decrease in trade caused by the new protectionist measures, 40 percent hit the least developed countries.
All of the classified least developed countries (except Tuvalu) suffered from these new policies; in fact, 141 of measured trade barriers caused detrimental effects for these countries. The ones impacted the worst included Tanzania, Ethiopia, Yemen, Bangladesh and Senegal.
The Global Economy and Economic Nationalism
Trump’s recent actions pose similar threats to the global economy and developing countries. Implementing tariffs and terminating trade deals disrupts the world trade system and undermines America’s commitment to the World Trade Organization (WTO) and free trade system.
Major economic organizations warn of the potentially catastrophic outcomes of Trump’s economic nationalism. If worldwide tariffs continued to rise up to the levels permitted by the WTO, global trade is predicted to decrease by nine percent. But again, it will be the developing countries that suffer the worst. This is because the income of developing nations is closely tied to the strength of the wealthier economies.
A recent speech by Christine Lagarde, the Managing Director of the International Monetary Fund (IMF), warned of the global effects of protectionism by highlighting the benefits of multilateral trade agreements. The multilateral system has decreased living costs and created millions of jobs with higher wages over the past generation.
The increased trade played a crucial role in halving the proportion of people living in extreme poverty. Multilateral trade agreements and the rules implemented by the WTO also help protect developing countries. These agreements limit the ability of powerful countries to dictate terms of trade that benefit them at the expense of the poorer country.
Fueling Positive Change
The WTO also includes special treatment for developing countries so as to provide more freedom in agreement implementation and national commitments, as well as accommodate nations’ limitations.
Multilateral cooperation and trade negotiations have decreased the average value of tariffs by 85 percent since 1947. This, combined with technological advances, has rapidly increased global trade to account for nearly 60 percent of the world’s GDP. In turn, this has fueled economic growth of developing countries and influenced positive social changes.
But a trade policy that undermines this multilateral system and advocates protectionism threatens developing countries. The trade war that Trump has started could lead to average tariffs on developing countries increasing from three percent to 37 percent. But some of the poorest countries, such as Costa Rica, Sri Lanka, Ethiopia and Bangladesh, may face tariffs around 40 to 50 percent.
Trump has incited a trade war by raising tariffs and terminating trade agreements. This could have catastrophic effects on the interconnected global economy, but ultimately, this protectionism threatens developing countries the most.
The tariffs and trade barriers will decrease developing nations’ ability to export, which lowers the import capacity and investment. Abandoning trade deals and undermining the world trade system leaves developing countries vulnerable to the power of larger economies dictating terms of trade.
Protectionism threatens the significant development and progress made under the cooperative world trade system of the last 20 years; thus, it will take concentrated effort to ensure developed and developing nations’ economic cooperation.
– Liesl Hostetter