05 November Tuesday

Trump’s Protectionism

Prabhat PatnaikUpdated: Tuesday Mar 27, 2018

ON March 8, Donald Trump made an  announcement which according to  many has the potential of starting a  global trade war. He announced that the  US would be raising tariffs on imported  steel by 25 per cent and tariffs on  imported aluminium by 10 per cent.  Now, the WTO allows tariffs  under certain circumstances, against,  for instance, some country that is  “unfairly” subsidising its exports, or  is dumping its goods, which means  charging higher prices on the domestic  market for the same goods that are  sold cheap in the export market. It  also allows tariffs under a “safeguard”  clause whereby a country can provide  temporary support to local producers  so that they can prepare themselves to  meet the challenge of imports.


Trump  however did not use either of these  WTO provisions for announcing his  tariff hike. He invoked instead a rarelyused  “national security” clause under  US law (a similar clause also exists  under the WTO).  What exactly constitutes “national  security” is difficult to define. The  military requirements of a country  involve a whole lot of goods; if the  import of such goods is prevented  under the plea that “national security”  requires their domestic production,  then virtually every good can be  reserved for domestic production.

 It is because of his invoking this  portmanteau clause that Trump’s  introduction of protectionist measures  is being seen not as some minor  development, a mere aberration within  a generally “free trade” regime, but as  an act of undermining this so-called  “free trade” regime itself.  This “free trade” regime which the  US and Europe had carefully built up  of late, had not of course meant “free  trade” per se; it had an in-built system  of discrimination against third world  countries. This was obviously so for  instance with regard to agricultural  subsidies and intellectual property  rights. But even this “free trade”  regime designed to serve its own  interests is being undermined by the  US under the Trump administration.  The fact that Trump is doing soonly  underscores the severity of the world  capitalist crisis and the fact that  neoliberal capitalism has reached a  complete dead-end. 

Of late there had been much  talk about how the world economy  was recovering, and how the US in  particular was coming out of the crisis,  with its official unemployment rate now  reduced to a mere 4.1 per cent. But if  this had actually been the case, then  the Trump administration would  have had no reason to introduce its  protectionist measures.  If the labour market is as tight  as a 4.1 per cent unemployment rate  suggests, then higher tariffs would  cause not higher domestic production in  the protected sectors but rather only an  increase in their prices, i.e., not output  adjustment but only price adjustment.  This would mean a mere gratuitous  promotion of domestic inflation that  is counterproductive for the economy.  The fact that the Trump administration  has resorted to protectionism indicates  therefore that the labour market is by  no means as tight as is made out, that  the crisis persists in the US economy.  Other indications also confirm this  view. For instance despite the official  unemployment rate being 4.1 per cent,  which is lower than at the beginning of  2008 when the crisis set in, the work  participation rate, i.e., the ratio of  those employed or seeking work, to the  working age population, continues to  remain below what it was at that earlier  date. If we assume the same work  participation rate today as existed in  January 2008, then the unemployment  rate in the US today would be not 4.1  per cent but 6.1 per cent.  A lower work participation rate  however typically arises because people  drop out of the work-force owing to  the dimness of the prospects of finding  work.

The persistence of a lower work  participation rate therefore throws  doubts even on the worth of the  official figure of 4.1 per cent  unemployment rate.  A similar conclusion arises when  we look at the wage rate. A tight labour  market tends to raise the wage rate,  but in the US despite the 4.1 per cent  official unemployment rate there has  been no increase in the wage rate  which suggests that the labour market  is far from being tight and the 4.1 per  cent figure is a misleading one. And  now Trump’s protectionist measure  only confirms that the US economy,  upon which the recovery of the entire  capitalist world is so vitally dependent,  continues to be mired in crisis. 

What is noteworthy is the fact that  Trump has resorted to protectionism  as the way out of the crisis, which is  also in conformity with what he had  promised during his election campaign.  He is not thinking of an expansion of  the US market through larger public  expenditure. The reason he is not  doing so is because any such strategy  requires that larger public expenditure  should be financed either through a  tax on capitalists (for taxing workers  who largely consume their income  offsets the expansionary effect of public  expenditure through a corresponding  reduction in workers’ consumption), or  through a fiscal deficit; and both these  are anathema for finance capital.  Since there is no plan to expand  the overall size of the market in the  US through larger public expenditure,  protectionism merely means that a  larger share of this existing market is  garnered for domestic production. It  amounts in other words to effecting  an expansion in domestic output and  employment through snatching a part  of the market from producers located  in other countries, which means that  the generation of employment within  the country would be accompanied by  the destruction of employment in other  countries.

This policy which is referred  to as a “beggar-my-neighbour”  policy (i.e., I gain at the expense of my  neighbour) is as much a manifestation  of the dire state of the capitalist world  at present, as a progenitor of worse  things to come.  It suggests a dire state because  it clearly demonstrates the complete  absence of any coordinated strategy  on the part of the capitalist powers;  and it portends a worsening of the  crisis because “beggar-my-neighbour”  policies inevitably attract retaliation  by others. Other countries are not  simply going to sit back and watch the  snatching away of their markets; they  are not just going to allow recession  and unemployment being exported to  their economies by the US. They in turn  would also protect their economies,  which would mean a generalisation of  “beggar-my-neighbour” policies.  And any such generalisation of  “beggar-my-neighbour” policies (or  the eruption of a “global trade war” as  some have put it) will further reduce  capitalists’ incentive to invest, and  hence further shrink investment and  aggregate demand, resulting in an  accentuation of the crisis. Nothing  could provide a clearer demonstration  than this of the complete dead-end to  which neoliberal capitalism has come.

 Some have of late used the term  “de-globalisation” to describe the  current situation. It is certainly the case  that the regime of “free trade” that the  US and Europe had erected as part of  the process of “globalisation” is being  significantly altered. But what is missed  in the term “de-globalisation” is that  there is absolutely no retreat either at  present or in prospect from the regime  of free global financial flows. 

To be sure, protection by the  US adversely affects manufacturing  activities located abroad by US capital  itself, to meet the US market while  taking advantage of low foreign  wages. In fact much of the imports  of manufactured goods into the US  from East Asia are produced by units  controlled by US capital itself. And  even discouraging the outsourcing  of services from the US to countries  like India, which actually the Obama  administration had started, constitutes  an encroachment on the profitability  of US companies. But all this refers to  capital-in-production not to capitalas-  finance. Upon the latter not an  iota of restriction is being imposed  or even contemplated by the Trump  administration.  It is because capital-as-finance  is not being restricted at all that the  opposition of finance to fiscal deficits  has to be respected. This rules out any  fiscal activism on the part of the State  to revive the economy, and leaves  protectionism as the only remaining  option, especially since monetary policy  has proved to be ineffective.  The restrictions on capital-inproduction  in short are a desperate  measure which is necessitated,  ironically, by the absence of any  restrictions on capital-as-finance. 

What the proponents of the idea  of “de-globalisation” miss is that the  current protectionist measures do not  in any way negate the phenomenon of  globalisation of finance which is the  essence of the process of globalisation.  What we are witnessing is not “deglobalisation”,  but desperate and  counter-productive attempts at  coping with a crisis, which is itself an  outcome of the process of globalisation  of finance, without in any way  negating that process. Since this  process is central to globalisation,  the current effort can be seen as  trying to cope with the fall-out  of globalisation without negating  globalisation. 

 

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