A thought experiment: “Light” protectionism as a support for growth in the USA

Domestic demand has long since been the key growth driver in the US. In past years, population growth has however noticeably slowed. As a result, possible positive stimuli arising from natural growth going forward have become smaller. To continue to generate strong economic growth, as the new president’s plans envisage, a positive contribution from foreign trade would therefore come in handy. Over the past 20 years, foreign trade has as a rule slowed US economic growth. This has happened despite exports to countries with which the US has a free trade agreement having surged disproportionately in recent years. The far stronger impulse from the enactment of the trade agreements was visible on the import side after all. In the final analysis, this trend led in the 1990s to the huge US foreign trade deficit. During that period, the import ratio, that is, the ratio of imports to gross domestic product, rose appreciably from 10 to 14 percent and has in recent years been in the order of about sixteen percent each year.

In accordance with our projections, foreign trade will this year weigh significantly on economic growth, slowing it by 0.6 percentage points such that the latter stands at only 2.2 percent. We could well imagine that an extensive “Buy national” campaign gets launched to counteract this and achieve more powerful economic growth as quickly as possible. For example, an attempt may be made over the next four years, namely during the period Donald Trump is in office, to reduce the negative foreign trade contribution to its long-standing average. Then, imports would need to be about USD 60 billion lower each year than they were last year, and would thus be lower than we have assumed in our baseline forecast. In 2017 imports would then not grow by 4.4 percent, but instead only 2.1 percent and would hardly rise in 2018.

At least those voters who backed Trump would no doubt swiftly follow such a campaign, as the call to “Buy national” can be equated with the “America first” slogan. Since slightly more than one quarter of imports are consumer goods, it would be quite conceivable that imports of this kind get cut back. The easiest change to make would be to consumer flows of those goods where a price-neutral substitution by domestic products is possible. Even if this were achieved without boosting investments in plant and equipment, it would already have a visible impact boosting growth in gross domestic product.

In order to satisfy additional consumer demand there would then presumably be a positive burst in investments. New factories cannot simply be erected overnight and the expansion of existing plant takes time. Planning and construction would take at least several weeks if not months. But either way, we would see a boost to investments. In such a scenario, economic growth in the coming year would be around 3.5 percent and thus certainly a percentage point more than in our baseline scenario. A comparatively swift surge in investments in the consumer goods industry could be achieved by granting tax breaks or financial grants. The risk in this thought experiment: Prices for certain consumer goods would climb appreciably in the short term, as expansion in domestic production would lag behind the turnaround in demand.

There is no doubt that protectionist isolation would impact not only the US economy, but also countless other countries. Our thought experiment shows that in the USA the effects high imports have in terms of dampening growth could be visibly decreased by slightly reducing the import side. In other words, higher economic growth could be achieved. In the final analysis, the scenario we have taken here of a “Buy national” campaign can be viewed as “light” protectionism. Were the campaign to be continued through to the next presidential election in 2020, not only could the target the president has set of around four percent be achieved, but the shortfall in foreign trade could be cut by almost half

Rate this article

Thank you for your rating. Your vote:
There is no rating yet. Be the first! Current average rating: 5.00

Leave an answer

Your e-mail address will not be published. Required fields are marked *