[Special Report] The new protectionism – 2017’s mega-trend

The political divide between ‘Left’ and ‘Right’ has become increasingly irrelevant. Today, the critical source of political risk emanates from a new divide between liberals and protectionists, with the pendulum swinging decisively towards the latter in 2016. The consequences for 2017 stand to be tumultuous, with the impact on emerging markets in Asia, Europe and Latin America particularly powerful.

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Liberalism is a much-misunderstood ideology. Speaking in 1983, Britain’s 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

Liberalism also stresses the importance of social mobility, meritocracy, cultural and racial diversity, higher education and personal equality, for instance in the case of gay marriage. Whereas ‘right-wing’ parties tended to emphasise economic liberalism, and ‘left-wing’ ones social liberalism, in many cases the two were coterminous. For instance, liberalism sought to soften or eliminate national borders, both as an obstacle to commerce (economic liberalism) and to individual aspiration and diversity (social liberalism). Political distinctions between left and right thus narrowed within an overarching liberal consensus.

The rapid gains made by the European Union between the Maastricht Treaty of 1992 and the Treaty of Lisbon in 2007 in dismantling many of the national barriers to commercial and human movement across what are highly distinctive European nation-states could be viewed as the apotheosis of the liberal consensus. Similar regional blocs on other continents sought to replicate the E.U.’s liberal gains, while the emergence and expansion of the World Trade Organization (WTO) sought to streamline the tangle of bilateral and multilateral trade agreements into a globally coherent whole. Regional and multilateral think-tanks, institutions and bodies proliferated to consolidate the new globalised, liberal environment.

The backlash

This 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 Americas

The 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 Americas

The 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 years

This 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 Peña 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 Andrés Manuel López Obrador (known as ‘Amlo’) as its response to Trump, who has drawn comparisons with both Trump and Venezuela’s late nationalist leader Hugo Chávez. 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 Chávez’s brand of anti-liberal caudillismo and continued under his successor Nicolas Maduro. The corruption scandals swirling around Argentina’s former president Cristina Fernández 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 protectionism

However, 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 Trump’s 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.

Asia

The new protectionism is likely to accelerate the trend in Western countries towards ‘re-shoring’, whereby industrial production is encouraged to return to developed economies and exploit the cost-savings offered by automation, rather than those of low-cost labour. A2 explores the implications of this trend in the following special report, Rags to rags: The impact of automation on Asia’s textile, clothing and footwear industries. Trump’s election and his promises to curb U.S. trade with China likewise have vast ramifications, as analysed in our special report, Trump vs China.

The ruling Communist Party of China depends on export-led growth to legitimise its political monopoly. If Trump imposes the sweeping tariffs on imports from China that he is pledging, this is likely to seriously dampen Chinese GDP growth and accelerate currency outflows that are forcing the central People’s Bank of China to spend its dollar reserves supporting the value of the renminbi.

There are signs the process might already be underway. Figures released in January 2017 showed that China’s exports crashed 7.7 per cent in 2016, with imports falling by 5.5 per cent. Reuters quoted Huang Songping, spokesperson for China’s General Administration of Customs, saying, ‘The trend of anti-globalization is becoming increasingly evident, and China is the biggest victim of this trend.’

Simply diverting Chinese exports away from the U.S. market towards Europe is likely to be thwarted by the post-Brexit complexion of the E.U., which will itself be more protectionist and resistant to absorbing Chinese over-production. China’s only other alternative market is to seek to boost domestic consumption, perhaps by strengthening its welfare safety net and thus persuade its citizenry to expend their savings, or by targeting other emerging markets, but these are also likely to suffer from the West’s inward turn, and China’s declining demand for their exports.

Repercussions in Asia

Painted into a corner, this raises the risk of a serious financial crisis in China within the five-year outlook, and the possibility of it launching some kind of diversionary conflict in Asia to deflect domestic unrest caused by such an economic reversal. Such a scenario has become even more credible as statements by Trump and his  appointees to high office target key Beijing ’red lines’ – notably Taiwan and the South China Sea – in manner guaranteed to add accelerants to China’s already heated nationalist sentiments and overdeveloped sense of its untested military prowess. Such a conflict centred on the South China Sea or Taiwan would effectively sever trade between China and the U.S., pitching the world into a deadly military-economic scenario with highly unpredictable and possibly catastrophic consequences.

Even short of this alarming scenario, there are operational, legal and political risks that the new protectionism is likely to present in Asia. It could, for instance, persuade traditionally reluctant trading nations to retreat into former patterns of import-substitution, as a retaliation for Western tariff and re-shoring initiatives.

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