Warnings against protectionism often cite the Smoot-Hawley Act of 1930, which implemented tariffs on more than 20,000 imported goods to boost domestic production during the Great Depression. The legislation failed miserably – prices rose, consumption plummeted and production fell even further. It is the ultimate warning against lousy trade policy, still invoked against elected officials today.
But we don’t need to look all the way back to the 1930s to see the dangers of protectionism. Our current trade dispute with Canada, the EU and other trading partners is inspiring anti-trade policies from markets we’ve been working to open for decades.
Just this week, the new prime minister of Malaysia, Mahathir Mohamad, declared the need for developing countries to protect their markets. He cited the actions of President Trump and his economic advisors in recent months, stating that “the U.S. no longer espouses free trade.”
Malaysia is a part of the Trans-Pacific Partnership (TPP), the 12-nation pact that the president withdrew from early last year, which is designed to reduce barriers to trade and investment throughout the Asia Pacific. It includes several known free-trade champions; Singapore, New Zealand, Australia and Peru are all true believers in the free-trade doctrine. New Zealand has sent a former prime minister to lead the World Trade Organization (WTO). Each of these countries worked tirelessly during the negotiations to fight the creep of protectionism.
But Malaysia always held back. Its infant automobile industry, in particular, has been a fixation of Malaysian leaders for decades, and the Southeast Asian country stalled for years before agreeing to real provisions that would open its market to investment and integration.
Now, as the United States backslides on its trade leadership, it is opening up a new opportunity for Malaysia and other developing countries to escape their free-trade commitments.
It’s not just highly visible goods like cars, soybeans, and natural gas that cross borders these days. Services and information are hugely important to the global economy, and barriers exist that restrict their cross-border flow, as well.
Vietnam, another reluctant TPP partner country, has finalized a new cybersecurity law that forces companies to keep “important” data on local servers. The law could be expensive and potentially compromising for U.S. businesses, and it flies in the face of the specialization that allows countries to grow together.
Much of this policy comes from an aging view of international trade. “American” cars are no longer made exclusively in the United States, from exclusively American parts by exclusively American workers.
As one Wharton Business School researcher recently noted, “According to the Made in America auto index … the models with the highest total domestic content are the Chevrolet Traverse, the Buick Enclave, and the GMC Acadia, with 85.5%. Some foreign-branded cars have proportions as high as 78.5%, including the Honda CR-V, Ridgeline, and Pilot, and the Acura RDX, the Kia Optima, and the Toyota Camry … even the most ‘American”’ automobiles have significant proportions of their value added through imported parts, something that would be expected from the international division of labor.”
The importation of parts or of unfinished goods fit into the modern supply chain and provide jobs and economic activity for American workers, just like exports of unfinished goods provide jobs and economic activity for workers in other countries.
This back in forth, in turn, creates a new class of consumers who can buy American goods and services with their newfound wealth. If they can’t buy American, these countries will continue to trade and invest elsewhere, whether it’s with the EU, Canada or South America. We are already witnessing an increase in soybean exports from Brazil and Argentina to the Asia Pacific, cutting American farmers out of a market they fought for years to enter.
Every day that this trade dispute continues will cost our businesses hard-won market share and, just as importantly, the forward progress for the freer and fairer trade we’ve pursued for nearly a century. America continues to be the leader of the free world but every word and deed from President Trump’s administration is closely watched by our trading partners. If we want to continue to be a leader on trade, we need to speak the language of free trade and investment.
Dan K. Eberhart is CEO of Canary, LLC, the largest independent oilfield services company in the United States.