Will Latin American also become more protectionist?

Patricio Navia

Buenos Aires Herald, January 27, 2017

 

In his first few days in office, President Donald J. Trump has made it clear that one of his campaign promises he intends to keep is a turn toward protectionism. By removing the United States from the Trade Pacific Partnership (TPP) agreement, announcing his intention to renegotiate the North American Free Trade Agreement (NAFTA) and threatening companies that are considering opening factories or plants outside of the US, the new president is signalling that his government will be less amenable to free trade. The rise of protectionism in the US will embolden Latin American leaders who have held long-held reservations about the alleged benefits of an open economy too. If Washington abandons one of the basic tenets of the Washington Consensus, Latin American countries will also move away from an era of open borders and few protectionist policies.

 

In his inaugural speech, Trump associated the notion of patriotism with protectionism and isolationism. In defining his “America First” policy, Trump asserted that “every decision on trade, on taxes, on immigration, on foreign affairs, will be made to benefit American workers and American families.” It is true that the president was a bit contradictory in his first speech. On the one hand, he embraced protectionism and announced a disengagement with intensive US involvement in global affairs. On the other, he also talked about reinforcing old alliances and creating new ones to aid his plan to eradicate Islamic terrorism “completely from the face of the Earth.”

 

Despite the contradictions, Trump was unequivocal in his message detailing the negative effects of free trade policies on domestic employment. The new US president summarised his economic plan with what he referred to as two simple rules: buy American and hire American. His appointment of protectionist activists to high-level positions where they will influence trade policy confirms that Trump will embrace protectionism as a central piece of his economic plan.

 

The effect of the drastic shift in official US policy on trade will have immediate repercussions around the world. Though economists disagree on how large the negative effect will be on economic growth, Trump’s protectionist message will find friendly ears in many countries with vocal constituencies that have long advocated more protectionism.

 

Protectionism in Latin America

In Latin America, the protectionist cause has historically been advocated by left-wing intellectuals, but politicians from the left and the right have also embraced different forms of this policy in the past. During the years of the Washington Consensus though, the dominant position was in favour of free trade. Few governments dared to advocate protectionist or industrial policies. But starting with the electoral victory of Hugo Chávez in Venezuela in 1998, the tide began to turn and — as other left-wing leaders were elected elsewhere in Latin America — protectionism again became a popular policy in the region. Governments implemented policies that made it more difficult for goods to freely travel into their countries or regional blocks. As Latin America was benefitting at the time from the commodity boom and its exports were in high demand, especially in Asia, the protectionist policies implemented did not trigger retaliatory measures by Latin America’s trade partners. The end of the commodity boom earlier this decade put pressure on the fiscal balance and hindered economic growth. As a result, incumbent governments — many of them left-wing and protectionist — were driven out of office. New market-friendly governments came to power and quickly began to embrace open border policies to boost economic growth and keep inflation down.

 

Trump’s adoption of protectionist policies takes place just as open-border policies were making a comeback in the region. Though the US is no longer South America’s most important trading partner — with the exception of Colombia — for Central America and Mexico, the US is still the most relevant export market. A more protectionist attitude in Washington will adversely affect growth prospects for those countries and it will inevitably feed calls for retaliatory forms of protectionism in those countries. Many politicians will jump onto the industrial policy advocacy bandwagon. If the US begins to promote domestic manufacturing, why shouldn’t Latin American countries do the same?

 

It remains to be seen if Trump will succeed in bringing back manufacturing jobs to the US and if that policy helps to “make America great again.” But regardless of the long-term consequences of such a move, Trump’s example will embolden nationalist leaders — from the left and right — throughout Latin America. Presidential hopefuls will begin to call for the adoption of protectionist policies and inward-oriented growth strategies. The promotion of domestic manufacturing and import-substitution industrialisation will once again gain traction and become politically viable. After all, if the country that historically promoted free trade is now becoming more protectionist, why should Latin American countries do something different?

 

The contagion effect of a US that renegotiates free-trade agreement will be soon felt elsewhere in the Americas. Countries will begin to adopt baby step protectionist policies to foster the strengthening of local manufacturing or the promotion of domestic employment. The moves will have only marginal consequences, but the more the US government embraces protectionism, the less popular the dominant open-border and free-trade policies will become in the rest of the hemisphere.