[Special Report] The new protectionism 2017's mega-trend
A dangerous backlash to Chinese copper-mining operations in eastern Ecuador adds instability to the region.
Gage Skidmore/ Flickr.com Liberalism is a much-misunderstood ideology. Speaking in 1983, Britains Prime Minister Margaret Thatcher, who is often considered right-wing, said that her ideology was best described as liberalism, in the classical sense. By this definition, liberalism is the idea that the government and legal system should get out of the way except in cases where individuals are directly harming each other, thereby ensuring a small, efficient state and market-driven economic development. In the 1990s and early 2000s, such liberalism became the consensus across the Western political spectrum. At an economic level, liberalism emphasised:
- the importance of minimising regulations
- eliminating tariff and non-tariff barriers to imports and exports
- the self-correcting nature of markets
- the inadvisability of industrial policy, state-owned enterprises and the government picking winners
- increasing state revenues through economic growth, rather than by raising tax rates
The backlashThis liberal consensus, however, is now coming asunder. A powerful critique of Western liberalism has emerged that casts liberals as members of a stateless elite class who are uniquely able to exploit the opportunities presented by frictionless global movement and commerce by virtue of their education, their qualifications from institutions with worldwide (as opposed to purely national) reputations, social connections and their relatively high levels of personal wealth. The new anti-liberal critique argued that the re-distribution of industries on a globalised basis, championed by this stateless elite, had encouraged manufacturing to relocate away from nationally low-cost bases such as the U.S. Midwest to globally low-cost bases such as eastern China. This promoted the rapid industrialisation of the latter, and the equally rapid de-industrialisation of the former. Those 'left behind' by de-industrialisation in the West generally lacked the globally accepted credentials of the elite class, and were more likely to have family commitments in their immediate vicinity that present significant hurdles to ranging long distances for work. This lack of frictionless hyper-mobility prevented them from seizing the opportunities presented by globalisation and ultimately, from supporting political parties that endorsed the liberal consensus. Disaggregated economic data provided anti-liberal critics with some powerful ammunition. Statistics produced by credible institutions ranging from the McKinsey Global Institute, to the London School of Economics and the U.S. Census Bureau suggested a long stagnation in household incomes in Western countries, while there was likewise plentiful evidence to suggest that the incomes of ultra-high-net-worth individuals had continued to curve upwards. It was possible to interpret the data differently, in a way that suggested that the hardships of Westerners were exaggerated, or at least were trivial in comparison to those of the poorer countries that liberal trade had done so much to enrich. Liberals could also point to a sharp uptick in U.S. household disposable incomes in 2015, as identified by the U.S. Census Bureau in September 2016, as suggestive of gains to come. However, attempts to make such points were politically complicated. They risked being portrayed as downplaying the hardships of the Western poor; of being more concerned with the welfare of foreign populations than domestic ones; and of those who presented such arguments existing personally within a detached 'bubble' of globalist affluence. Moreover, prescriptions of further liberalism as a remedy arguably lacked the urgency required by the moment. Momentum had shifted to the anti-liberals. Electorates surged towards leaders who offered to use the power of the state to change the terms of trade in favour of their domestic national audience. In one indicator of liberal disarray, no universally accepted adjective exists to describe this anti-liberal platform. 'Statist', 'authoritarian, populist, nationalist, nativist or even Gaullist capture some elements of the trend, but not exactly. For want of a better description, this report will use the term protectionist.
The AmericasThe rise of Donald Trump has been the most profound expression of this new economic protectionism. His election as U.S. president in November 2016, following a career as a real-estate magnate and television personality, defied hitherto-accurate pollsters such as FiveThirtyEight, who failed to foresee the extent to which his anti-liberal, anti-globalist message would resonate in Midwestern states such as Michigan that are highly sensitised to the shift in manufacturing to countries such as Mexico and China. Michigan's decision to endorse Trump more a result of his suppressing turnout among low-income Democrat voters than a direct transfer in their support seemed to yield the state immediate benefits, even before Trump's inauguration. In January 2017, the Ford Motor Company announced that it was abandoning plans to build a factory in Mexico and would instead invest USD700 million to expand its site at Flat Rock, Michigan. Ford's leadership conceded that Trump's election was a factor; he had promised a big border tax on cars imported from Mexico. The same month Fiat-Chrysler announced a USD1 billion plan to build models currently produced in Mexico in the Midwest. Its chief executive Sergio Marchionne warned that his company would have to close its Mexico plants if Trump followed through on his border tax pledge.
Repercussions in the AmericasThe outcome for Mexico, by contrast, has been destabilising. Trump's political surge over the past year and his ultimate victory has caused the Mexican peso to lose 20 per cent of its value against the U.S. dollar. Assuming that Trump maintains pressure on Mexico-based factories to re-locate to the U.S., Mexico's macro-economic profile is likely to deteriorate rapidly over the next four years, with a concomitant loss of social stability.
Mexico's macro-economic profile is likely to deteriorate rapidly over the next four yearsThis has contributed to inflation that in January stoked widespread civil unrest across the country, in protest at rising fuel prices. Trump's impact is also psychological: President Enrique Pe a Nieto's decision to liberalise the fuel market, at a moment that the U.S. president-elect is forcing companies to re-locate away from Mexico, is fraying popular support for his liberal market policies and stoking opposition to his government. Mexico is particularly vulnerable as a member of the North American Free Trade Association, or Nafta, which Trump has promised to unilaterally renegotiate. A January Ipsos poll of Mexicans suggested that a majority would rather abandon Nafta altogether rather than bending to Trump's demands. Trump's unilateralism in this regard imperils not only Nafta but similar free-trade areas to which the U.S. is a party. To some degree, it is not impossible that a Mexican government would consider expropriating the factories of U.S. business located in the country, or imposing capital controls, as a means of expressing defiance towards the Trump administration and preventing their exit. Such a confrontation is particularly possible if Mexico elects the left-wing nationalist firebrand Andr's Manuel L'pez Obrador (known as 'Amlo') as its response to Trump, who has drawn comparisons with both Trump and Venezuela's late nationalist leader Hugo Ch'vez. Trump's policies much increase the likelihood that Amlo will win power in next year's Mexican presidential election. Trump's impact south of Mexico is likely to be more stylistic than direct, but in Latin America the stylistic overtones are important. Trump's persona aligns with a strongman variety of authoritarian politics that is well-known in the region as caudillismo. His election could instigate the rise of new caudillo-style paternalists, at a moment when they appeared to be nearing extinction especially if his strong-arming of corporations to move jobs to the U.S. is perceived as effective. At the same time, and unlike in previous decades, protectionism is not currently a major strand of thought on either the Latin American Right or Left. To a large extent this is because the regional press is fixated on Venezuela and the fully fledged economic and political crisis that stemmed from the late Huge Ch'vez's brand of anti-liberal caudillismo and continued under his successor Nicolas Maduro. The corruption scandals swirling around Argentina's former president Cristina Fernandez de Kirchner, who also pursued an economically nationalist agenda, further limit the appetite for a Latin brand of Trumpism.
China's export-driven model is also likely to be heavily disrupted by Trump's protectionismHowever, even Latin American leaders who are committed to liberalism and globalisation are likely to adopt protectionist and retaliatory measures against Trump policies they construe as harmful to their countries, purely for defensive political purposes rather than as part of a coherent economic strategy to mitigate the damage of Trump's protectionism to their economies. In this instance, the collapse of the liberal consensus would become self-fulfilling. Brazil, for instance, today exports more goods to China than it does to the United States. This does not mean that China can offset any loss of demand in the U.S. for Brazilian exports, however. China's export-driven model is also likely to be heavily disrupted by Trumps protectionism (see Asia section below), thus limiting its already-sluggish development as a major global consumer market. At best, international investors in Latin America are likely to encounter a new wave of retaliatory tariff and non-tariff barriers to their operations, as regional governments favour local operators over more efficient or cost-effective global operators, or reserve extractive projects purely for national or Latin American investors, perhaps under Unasur cover. U.S. corporations are particularly vulnerable, but it is not inconceivable that those from other countries would also be marginalised as Latin America re-focuses on intra-regional rather than international trade. At worst, the entire continent could shift towards a protectionist system whereby foreign assets are routinely expropriated and absorbed into new state-champion conglomerates operating with state guarantees a Latin American variant of the East Asian Development Model. Such acts would embarrass Trump and potentially initiate a trade war that triggers the de facto collapse of the WTO. North of the U.S. border, the implications for Canada are probably less profound. Its prime minister, Justin Trudeau, is the polar opposite of Trump ideologically, as leader of Canada's Liberal party and as a vocal opponent of nativism within his own country. Yet Canada is by no means an exemplar of economic liberalism. Even its Conservative governments have intervened to prevent foreign takeovers of Canadian companies and assets, and in some respects Trump could serve to tighten economic links between the neighbours. For instance, Trump has pledged to revive the Keystone XL pipeline project linking them. Moreover, his trade and immigration rhetoric has a clear racial slant, targeting developing countries rather than largely Anglophone developed ones such as Canada.