Latin America advocates for free trade in a protectionist world

Patricio Navia

Buenos Aires Herald, November 25, 2016

 

Precisely as market-friendly candidates in Latin America win elections to replace protectionist governments — ones that had come to power in the last 15 years in the so-called “pink tide” (as opposed to a full-blown “red tide”) of left-wing electoral victories in the region — the wider world seems to be moving back toward protectionism, as newly elected leaders promise to erect barriers to trade.

 

At the Asia Pacific Economic Cooperation (APEC) summit, held in Lima, Peru, this past weekend, the mood was not upbeat. Though its 21 member countries reiterated their commitment to eliminating trade barriers, after the Brexit vote and Donald Trump’s victory in the US election, there is little hope for market-friendly advocates around the world. In fact, just two days after APEC ended, Trump announced that his government would withdraw from the Trans-Pacific Partnership (TPP) trade deal, an initiative championed by several APEC members.

 

Resistance against trade has historic roots in Latin America, but it is also now becoming increasingly popular in industrialised countries. By increasing competition, free trade benefits consumers. People have access to more goods at lower prices. Yet, because there is more competition, companies are hard pressed to reduce costs. Bringing labour costs down in manufacturing, intensive production has become the only survival strategy for many companies. That has led corporations to move factories away from more developed countries where labour costs are more expensive and relocate in less developed countries in search of a more competitive edge.

 

People are both consumers and workers. As consumers, they benefit from free trade. As workers, especially in industrialised countries with a manufacturing sector that pays high wages, they see free markets as a threat to their jobs. Economists argue that the benefits of trade far outweigh its costs. Yet, recent elections in the US — and longstanding support for protectionism in other countries, including some Latin American nations — have shown that many people are longing for more protectionism.

 

The renewed demand for protectionism could be a case of people yearning for policies that will end up being detrimental to their wellbeing. After all, there are more consumers in the US than workers in the country’s manufacturing sector. Higher prices for manufactured goods will benefit those who work in a disappearing industry, but they will hurt a much larger group of consumers. Moreover, even if the sacrifice was worth it, protectionist policies will have immediate negative effects on inflation and consumption power for most US citizens while the benefits for unemployed workers in the industrial sector will take longer to materialize, if they in fact materialize at all.

 

Inward development

In Latin America, left- and right-wing governments in the past embraced protectionist policies to promote inward development. Import-substitution industrialisation (ISI) became the dominant model in the 1950s and 1960s. Eventually, after the debt crisis in the 1980s and the imposition of the market-friendly Washington Consensus, Latin American countries embraced trade openness as the recipe for economic development. Though some countries made significant progress, as a result of the adoption of market-friendly policies, uneven results led voters in some of the countries to have a change of heart, starting in the late 1990s. It all started with the election of Hugo Chávez in Venezuela, whose inward-oriented development strategy sought to reindustrialise the nation. Other left-wing governments in the region, including Néstor and Cristina Kirchner in Argentina, Bolivia’s Evo Morales and Rafael Correa in Ecuador also came to power campaigning against neoliberalism and promising to adopt protectionist policies that would help promote domestic industrialisation. At a time when the world was moving decisively toward eliminating trade barriers, several countries in Latin America were more sceptical (though they also benefitted from a boom in the prices of commodities).

 

The end of the commodity boom has stalled the new wave of domestic industrialisation. Voters in Latin America have thrown left-wing governments out of office and have elected market-friendly leaders. While the press has correctly noted that Latin American countries seem to be shifting right, the shift toward a more open economy has not received similar attention.

 

Ironically, market-friendly governments are coming to power in Latin America when protectionism is on the rise in the industrialised world. Trump’s election on a protectionist platform is the most recent setback for free-trade advocates. Though many observers have predicted that he will reverse some of his most radical and controversial campaign promises, Trump will likely live up to his protectionist promises. After all, he won the electoral college because he brought to the ballot-box new voters in states that have suffered the most from the decay of manufacturing jobs in the US.

 

As they open up to trade, new Latin American leaders are swimming against the tide in the world. Their efforts might end up paying off in the long run, but in the short-run the protectionist wave in the industrialized world — soon to be propelled by Trump’s ascension to power — will render many of the efforts of new market-friendly leaders in Latin America useless.