Sunday, November 13, 2016
The last thing we need is a protectionist president
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

The way we used to worry about the intrusion of politics into the economy and business now seems quaint and old-fashioned, belonging to a very different era. It is hard to believe it is only 18 months since the Conservatives and Labour squared up in the 2015 general election.

And, despite everything written at the time, including by me, the economy’s path under the economic policies put forward then would not have been very different whatever the outcome, though Labour would not have had a referendum.

2016 has changed that. Politics has become predictably unpredictable. Brexit and Donald Trump’s victory will bring much more change than any conventional election. Change, after all, is what people voted for. And, with important French and German elections coming up next year, there is plenty of scope for more unpredictable outcomes.

Even in Britain, the next election would at least throw up the possibility, however remote, of a shift away from the narrow territory around the centre-ground; in the form of a Labour government under Jeremy Corbyn.

What will the latest intrusion of a different kind of politics mean for Britain? If you were looking for historical precedents, Donald Trump could be seen as a hybrid of Dwight D Eisenhower and Ronald Reagan; rebuilding America’s crumbling infrastructure and slashing taxes to boost America’s growth rate.

That, notwithstanding the impact of this expansionism on America’s debt and deficits – which will worry some - together with his pledge that Britain would be at the front rather than the back of the queue when it comes to new trade deals, sounds very positive.

America, after all, is Britain’s single biggest export market, accounting for 17% of exports of goods and services. It is also a country that, unusually, Britain runs a sizeable trade surplus with, even in goods. That surplus was £14bn last year, and will be helped by sterling’s post-referendum fall to the lowest level in three decades. There is also a good platform for future trade growth. Britain’s exports of goods to America, £47bn last year, were up by nearly a fifth on two years earlier.

But then there is the other Trump; the protectionist Trump, the America First Trump who also wants to cut America’s admittedly large financial commitment to Nato. In 1930 Herbert Hoover signed into law the Smoot-Hawley tariff on a huge range of imports, provoking the trade war which deepened and prolonged the Great Depression.

Trump as Hoover proposes a 45% tariff on Chinese and 35% on Mexican imports. He would revisit Nafta, the North American Free Trade Agreement, inevitable if he carries out his threat on Mexican tariffs and building a wall. The Trans-Pacific Partnership (TPP) would be sunk, as would the the barely-alive Transatlantic Trade and Investment Partnership (TTIP).

All this arises from a very different attitude towards globalisation than that taken by the British government. Theresa May and her ministers recognise that there are losers as well as winners from globalisation and that more should be done to help them. Trump appears to want to tackle the problem at source, on the argument that globalisation mainly benefits other countries and big corporations and should be reined back.

This is an argument that should have been challenged more aggressively, particularly in the years since the crisis. Economists have taken it as given that free trade delivers sustained economic gains, which is supported both by theory and the post-1945 growth and prosperity of the world economy.

Now the argument is in danger of being lost. Clemens Fuest, president of the Munich-based Ifo Institute economic think tank, said: "If Trump goes ahead and erects trade barriers as planned, the damage will be huge.”

There would never be a good time for a president with highly protectionist policies to be elected, but this is a particularly bad one. The missing ingredient from the world economy since the crisis has been world trade growth. Before 2008, world trade grew significantly faster than global gross domestic product, usually around twice as fast, sometimes more.

Since it, it has struggled to keep pace with global GDP. World trade has not been a driver of global growth because of subtle protectionism, constraints on trade credit, and so on. The World Trade Organisation says 2016 will be the weakest year for world trade growth since the crisis and will be the first in 15 years in which world trade grows more slowly than global GDP. It has called on countries to “heed the lessons of history and re-commit to openness in trade”.

There are, it should be said, other forms of globalization than physical trade. A recent report by the McKinsey Global Institute pointed out that cross-border data flows are 45 times larger than they were a decade ago. Digital globalization continues apace.

But the weakness of conventional trade matters a lot, particularly to Britain as an open economy, a trading nation. Britain’s exports have been going nowhere fast in recent years. Last year the total, for exports of goods and services, £509bn, was down in their level two years earlier and a mere 2% up on 2011, making a mockery of George Osborne’s target of doubling exports by the end of the decade. Some of this was due to a drop in oil exports, from £39bn in 2011 to £21bn last year, but exports of goods excluding oil have also disappointed, down from £270bn to £262bn.

This was partly as a result of the eurozone crisis but largely down to the post-crisis weakness in world trade. The last thing Britain’s exporters want is a president whose policies will mean a further reduction in world trade growth. Any advantage bestowed on Britain by Trump’s renewal of the special relationship would be more than offset by the danger of tit-for-tat protectionism and a modern-day trade war.

Will it happen, or was Trump’s campaign bark on protectionism a lot worse than his presidential bite will turn out to be? China’s vice-minister for finance Shi Yaobin said as much on a visit to London last week, suggesting that Trump’s tough words on China and trade were to win election and that the president-elect would soon realise the benefits of co-operation with China.

He may be right, though it is too early to say. Trump as Eisenhower-Reagan, emphasising infrastructure and cutting taxes, including America’s higher 35% corporate tax rate, would be positive for Britain and the world economy. Trump as Hoover most definitely would not be. We have to hope that the right one wins out.