Download Protectionism: A Potential Peril for the US Economy

ECONOMICINSIGHTS
Protectionism:APotentialPerilfortheU.S.Economy
October14,2016
ZaneE.Brown
Partner,FixedIncomeStrategist
841Views
PopularsentimentappearstoberisingforincreasedrestrictionsonU.S.trade.
Dothenames“Smoot”and“Hawley”ringabell?
InBrief
Protectionistsentimentisgrowinginmanydevelopedeconomies,f ueledbyconcernsabout
incomeinequalityandeconomicstagnation.
Thishasalreadyresultedinsomedramaticdevelopmentsf orglobaltrade,includingthe
“Brexit”voteintheUnitedKingdom.
Inaddition,bothmajorU.S.presidentialcandidateshavespokenoutagainsttheTrans-Pacif ic
Partnershiptradeaccord.Forhispart,DonaldTrumphasadvocatedtarif f songoodsf rom
ChinaandMexico,accordingtopressreports.
Butif historyisanyguide,anynewroundof protectionistmeasureswouldnotendwell.The
Smoot-HawleyTarif f Actof 1930(seebelow)wasf ollowedbyatremendousworldwide
economicslump.
Thekeytakeaway—ThebestU.S.responsetotheresurgenceinprotectionistsentiment
maybearenewedfocusoneconomicgrowth,jobcreation,andworkerretraining.
Agrowingglobalpopulistmovementtowardprotectionismcouldhavedamagingconsequencesf or
worldgrowth.Drivenbyconcernsaboutincomeinequalityandstagnanteconomicgrowth,
protectionistsentimentintheUnitedKingdom,theEuropeanUnion,andnowintheUnitedStatesis
changingthepoliticallandscape.
Wealreadyhaveseentheseconcernsproducepolicyresponsesandref erendumsinvarious
countriesaimedatprotectingjobs.IntheUnitedStates,f orexample,withbothmajorpresidential
candidatesexpressingvariationsof the“ourjobsarebeingstolen,exported,ortakenby
immigrants”ref rain,thewillingnesstobuildeconomicorphysicalbarrierstopreserveindustriesand
jobsisgainingpopularity.TheenvironmentiseerilysimilartothatsurroundingAmerica’slastf oray
intoprotectionism,theSmoot-HawleyTarif f Actof 1930(Smoot-Hawley).*Theoutcomeof that
legislationsuggeststhatasimilarpathof beggar-thy-neighborprotectionismmaynotendwellf or
anyof us.
ImmigrationConcerns
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TheUKvotef or“Brexit,”theriseof politicalparties,suchastheEuroscepticsinItalyandMarine
LePen’sNationalFrontinFrance,andthepopularityof f ree-tradeopponents,suchasBernie
SandersandDonaldTrumpintheUnitedStates,representagroundswellof populistsupport.The
populistmovementseemsunif iedindemandingprotectionstoguardagainstjoblossdueto
immigration,currencymanipulation,predatorypricing,orcheaperemergingmarketlabor.Those
protectionsgenerallytakethef ormof immigrationref ormortradetarif f s.
Boththoseproposedsolutionsseemtoreversethetrendtoward,andthecostreductionbenef its
of ,globalization.TheUK’sversionof immigrationref ormwastostopthef reef lowof immigrantsby
removingitself f romtheEuropeanUnion.Inourview,Trump’sthreatof buildingawallalongthe
U.S.borderwithMexico—America’sthirdlargesttradingpartner—isjustasdramaticastheUK’s
solution,andasisolationist.
Thoseinf avorof endingimmigrationwouldbewisetostudyJapan’sexperience.Japan’sdeclining
populationandrestrictiveimmigrationpolicieshavecombinedtocontributetoyearsof lost
economicgrowth.ThepopulistbacklashagainstimmigrationintheEuropeanUnionandinthe
UnitedStatescouldcreateeconomichurdlessimilartothosethathaveexistedinJapan,with
similarconsequencestoeconomicgrowth.
TradeWinds
Thesecondf ormof protectionismcomesinthef ormof traderestrictions.BothmajorU.S.
presidentialcandidateshavepromisedtobackoutof theTrans-Pacif icPartnership(TPP)trade
agreement.TheTPP,encompassing12Pacif icRimnations,includingtheUnitedStates,cutsmore
than18,000tarif f sandeliminatesalmostalltarif f sonU.S.manuf acturedgoodsandf armproducts
inotherTPPeconomies.Itwouldbethelargestf ree-tradeagreementf ortheUnitedStates,
accordingtotheCongressionalResearchService.
SignedbyPresidentObamainFebruary2016,butnotyetratif iedbyCongress,theTPPis
expectedtohavemodestlong-termeconomicbenef its,accordingtoprojectionsbytheWorld
Bank,theU.S.InternationalTradeCommission,andthePetersonInstitute.Importsandexports
arebothprojectedtoincrease,asarewages,butbenef itsarelikelytoaccruemoretoskilledthan
unskilledlabor.TheU.S.InternationalTradeCommissionprojectsthatincreasesintheincomeof
skilledlaborwouldaccountf orabout41%of U.S.grossdomesticproductgrowthattributableto
TPP,whileincreasesinincomeof unskilledlaborwouldaccountf orabout25%,withtheremaining
34%,of course,goingtobusinessowners.
Beyondthepopulistconcernsof theeconomicinequalityresultingf romtheTPP,thebiggestf ear,
of course,islossof jobs.Thebalancebetweenpreservingemploymentf orsomeandbroader
economicbenef itsf orothershasbeenaknottyissueintradepolicysincetheearlydaysof the
UnitedStates.Thef irstsecretaryof theU.S.Treasury,AlexanderHamilton,f avoredtarif f sto
protectandpromotejobs,whileThomasJef f ersonarguedthathighertarif f swouldhurt
consumers.Throughoutourhistorythebalancehasalternatelytiltedtowardandawayf romimport
duties,butrarelytothepointof dramaticeconomicconsequence.
SmootPoints
Alongthelinesof amoredramaticshif t,Trumphasadoptedamoreaggressiveapproachto
protectionismthanjustopposingtheTPP.Amongotherinitiatives,hehasthreatenedtounwind
theNorthAmericanFreeTradeAgreementandimposetarif f sof 35%onimportsf romMexicoand
45%onthosef romChina,accordingtoreportsf romCNNandothersources.Pursuitof such
protectionistmeasurescouldbecostly.
Thelastmajoref f orttoinvokesubstantialtarif f stoprotectAmericanjobswasthepreviously
mentionedSmoot-HawleyTarif f Act.PassedintheSenatebyanarrowmarginof 44-42and
signedbyPresidentHooverin1930,despiteapetitionf rom1,028economistsurginghisveto,
Smoot-Hawleyraised,torecordlevels,importdutiesonmorethan20,000agriculturaland
industrialgoods.Foreigngovernmentsretaliated,andU.S.exportstoEuropef ellbytwo-thirds
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between1929and1932.Americanf armexportswereparticularlyhurt,contributingtoagricultural
bankruptciesaswellasf ailuresamongbanksthatspecializedinagriculturalloans.Thedif f iculties
wereechoedamongexportersof manuf acturedproductsandthebanksthatsupportedthose
industries.
Theimpactof Smoot-HawleyontheU.S.economyoccurredwithinanenvironmentinwhichexports
accountedf or5%of grossnationalproduct(anearliermeasureof theoutputof theU.S.
economy),comparedwithabout13%of grossdomesticproducttoday.Between1929and1934,
worldtradef ellby66%,accordingtotheU.S.Departmentof State.Today’smoretightly
integratedglobaleconomycouldimplydramaticeconomicconsequencesif aggressive
protectionisttrademeasuresproducespiralingretaliatoryresponses.
AnotherSolution?
Whilehighertarif f swerenottheonlyf actorinf luencingtheeconomicf ree-f allandrising
unemploymentduringthe1930s,f ormerU.S.FederalReservechairmanBenBernankeputthe
now-inf amousprotectionistlegislationintoperspective:“EconomistsstillagreethatSmoot-Hawley
andtheensuingtarif f warswerehighlycounterproductiveandcontributedtothedepthandlength
of theglobaldepression.”
Regardlessof theoutcomeof theU.S.elections,let’shopethatlawmakersinWashingtoninclude
studentsof historywhounderstandthebitterlessonof protectionism:Intheshortrun,itmay
indeedreduceimportsandpreservejobs,buttheinevitableretaliationof othercountriescould
producelonger-termconsequencesthatoverwhelmanyshort-livedbenef its.Thepoliticalprocess
shouldbecapableof developingamoreef f ectivesolutiontothecausesof protectionistsentiment
intheUnitedStatesthroughthepromotionof economicgrowth,jobcreation,andworkerretraining.
*Smoot-HawleyTarif f Act,f ormallytheUnitedStatesTarif f Actof 1930,alsocalledHawley-SmootTarif f Act,wasa
pieceof U.S.legislation(signedintolawJune17,1930)thatraisedimportdutiestoprotectAmericanbusinessesand
f armers,addingconsiderablestraintotheinternationaleconomicclimateof theGreatDepression.
Thiscommentarymaycontainassumptionsthatare“f orward-lookingstatements,”whicharebasedoncertain
assumptionsof f utureevents.Actualeventsaredif f iculttopredictandmaydif f erf romthoseassumed.Therecanbe
noassurancethatf orward-lookingstatementswillmaterializeorthatactualreturnsorresultswillnotbematerially
dif f erentf romthosedescribedhere.
Statementsconcerningf inancialmarkettrendsarebasedoncurrentmarketconditions,whichwillf luctuate.Thereis
noguaranteethatmarketswillperf orminasimilarmannerundersimilarconditionsinthef uture.
Grossdomesticproduct(GDP)isthemonetaryvalueof allthef inishedgoodsandservicesproducedwithina
country'sbordersinaspecif ictimeperiod,thoughGDPisusuallycalculatedonanannualbasis.Itincludesallof
privateandpublicconsumption,governmentoutlays,investmentsandexportslessimportsthatoccurwithinadef ined
territory.
Theopinionsintheprecedingeconomiccommentaryareasofthedateofpublicationandaresubjecttochange.Additionally,
theopinionsmaynotrepresenttheopinionsofthefirmasawhole.Thedocumentisnotintendedforuseasforecast,
researchorinvestmentadviceconcerninganyparticularinvestmentorthemarketsingeneral,anditisnotintendedtobe
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Abbettdoesnotwarranttheaccuracyandcompletenessoftheinformation.
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