Global economy cannot afford Trump’s protectionist policies

For all of Donald Trump’s America-first pro-growth rhetoric, analysts don’t think the global economy can afford the US president’s protectionist policies.

At the heart of Trump’s protectionist policies is the notion that free trade and globalisation have not benefited the middle and lower class, and created further income inequality. But economists argue that Trump turning his back on globalisation in favour of protectionism can hurt the US’s economy, especially the very social classes Trump vowed to help.

Alp Eke, senior economist at the National Bank of Abu Dhabi, cited the International Monetary Fund and other research institutions, saying that protectionist policies “will definitely be counterproductive and will hinder growth and cause uncertainty.”

“Uncertainty about the future will slow down investment, and eventually, consumption as business will reduce jobs. Right-wing candidates are gaining popularity in Europe as well, which may mean more protectionist/populist measures are expected.

This development is worrisome at a time where expansionary monetary policies coupled with negative interest rates started to reach its limits and further measures will be ineffective,” he said

While talks of protectionism have centred on Trump’s policies, Europe is witnessing a similar trend. The UK’s decision to leave the European Union was also backed by protectionist rhetoric, with right-wing movements in France and Germany voicing similar interests.

TPP withdrawal

In the US, after just a few days into office, Trump signed an executive order to pull the States out of the Trans-Pacific Partnership, a 12-nation trade deal that includes some of the world’s largest economies. The countries remaining in the pact are Canada, Japan, Australia, New Zealand, Peru, Malaysia, Mexico, Vietnam, Chile, Singapore, and Brunei.

A report issued by HSBC’s global research division on January 26 said the US’s withdrawal from TPP is having a negative impact on business sentiment “at a time the global economy can ill afford it.”

“From some news reports, it appears that the withdrawal may have emboldened advocates of protectionism in the United States and potentially elsewhere — a development that could prove even more costly to the economy.

Unfortunately, the forgone growth potential associated with exit from TPP may leave the US economy worse off than it otherwise would have been,” the report said.

It pointed that exiting the TPP also hurts progress in addressing issues related to the environment, worker rights, and protection of business.

UAE trade position

In the UAE, where the government has been boosting efforts to position the country as a trade hub, analysts don’t expect protectionist measures around the world to have a significant impact on the economy.

“Even though protectionist measures may gain popularity in the US and Europe, UAE trade will not be impacted severely. The UAE is expected to benefit greatly by Iran’s integrating into global economy, trade, and investment ties are strengthening with India as well,” NBAD’s Eke said.

For the US and Europe, analysts don’t expect to see the impact of such protectionist policies in the very near future.

Long-term impact

In its report, HSBC said the economic damage from the cancellation of the TPP in its current form will come from “forgone future gains in the region, translating into lower rates and less innovation than would have otherwise been the case.”

“Those lost gains may not be obvious to some observers, but they are real. Slow growth in the TPP region could spill over into other regions through low TPP-country import demand,” the report said.

Naeem Aslam, chief market analyst at Think Markets, agreed with that view, saying it was difficult to knit a scenario under which protectionist policies could stimulate growth.

“Here we are … and both Donald Trump and Theresa May (UK Prime Minister) are in the driving seat. Perhaps they will be able to carve some deal which could be beneficial for their own countries, but for global growth, it is not beneficial. We will not see the impact of these protectionist policies for a few years to come,” he said.

And creating further risk for the world’s economy is the fact that Trump seems unpredictable, and economists are still unable to gauge his intentions, with some expecting possible trade wars as a result of the US president’s protectionist policies.

In his first week in office, for example, he signed an executive order to build a wall along the Mexican border — a campaign promise many had long dismissed as unfeasible, unpractical, and too pricey.

It is still uncertain how the wall would be funded, but the White House raised the possibility of imposing a 20 per cent tariff on goods imported from Mexico to pay for the wall. Economists argue, however, that it would be companies and consumers in the US that end up bearing the brunt of the tariffs.

Paul Krugman, a Nobel Prize-winning economist and professor in the Graduate Centre Economics PhD programme, pointed that, if imposed, the tariff would mean trade barriers starting to go up all around the world as many other countries may follow suit in imposing similar tariffs.

“The risk wouldn’t so much be one of retaliation — although that, too — as of emulation: If we treat the rules with contempt, so will everyone else. The whole trading system would start to unravel, with hugely disruptive effects everywhere, very much including US manufacturing,” he said in an opinion piece for The New York Times.

source : gulfnews