Jun 08, 2018 - 1:30pm

Chronicle of a Trade Debacle Foretold


Senior Vice President, Americas

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A tugboat guides a cargo ship into the Port of Long Beach in Long Beach, CA.
A tugboat guides a cargo ship into the Port of Long Beach in Long Beach, CA.

At precisely the moment the White House could be taking a victory lap for surging business and consumer confidence indices owed to the President’s first-in-a-generation tax reform and sweeping regulatory overhaul, the Trump administration instead risks snatching defeat from the jaws of victory following a flurry of protectionist measures that threaten lasting harm to American workers, consumers and businesses. 

The White House announcement to impose steel and aluminum tariffs on indispensable U.S. allies and trading partners Canada, Mexico and the European Union is the latest – and most ominous – action in a string of measures that have already resulted in retaliation and invite a broader trade war. 

The move followed closely on the heels of the administration’s announcement that it would follow through on a recent pledge to apply 25% tariffs to $50 billion of imported Chinese goods under the auspices of Section 301 of the Trade Act of 1974. U.S. Chamber President and CEO Tom Donohue made clear that, though the U.S. business community staunchly supports U.S. action to curb unfair Chinese trade practices, “the use of tariffs puts all the burden on American companies and consumers.” 

And both of these actions follow the administration’s announcement that it would launch an investigation that could result in the application of a 25% tariff on imported autos and auto parts, a move Donohue warned would, “...deal a staggering blow to the very industry it purports to protect...”

These measures are part of an administration approach to trade policy that many view as so unorthodox as to be unprecedented. But those familiar with Latin American economic history might beg to differ.

In fact, there is a historical record that conjures parallels to the isolationist brand of trade policy the U.S. is pursuing. It was known as Import Substitution Industrialization (ISI), and it was such a resounding failure that it died an unseemly death in the 1970s. 

While ISI was pursued in multiple Latin American countries in the decades following World War II, Chile was its poster child. Seeking a way to shield its nascent manufacturing sector from global competition, Chilean policymakers implemented protectionist measures in the form of high tariffs and duties, strict quotas, exchange controls, and restrictive import licenses in an active effort to discourage goods importation.

In theory, the aim was to rely almost entirely on domestic consumption to fuel development of a Chilean manufacturing sector unburdened by the presence of foreign competition. In practice, what transpired was an economic disaster that traced its roots to gross inefficiencies, wanton misallocation of capital, and systemic market distortions. Chile’s economy entered into a self-reinforcing death spiral whereby inefficient production begot higher costs, rampant inflation, soaring unemployment, and stratospheric levels of national debt. 

At ISI’s nadir in 1972, inflation spiked past 200%, the fiscal deficit topped 13% of GDP, public debt mushroomed by 300%, hard currency reserves evaporated, and real wages declined by 25%.

Believing trade to be a zero-sum game the U.S. is “losing,” the Trump administration, like one-time practitioners of ISI, embraces erecting barriers to foreign competition in the interest of American workers, consumers and the U.S. manufacturing sector. But here ISI offers perhaps the most poignant lesson in the unintended consequences of misguided protectionist policies.

In perhaps its most cruel twist, ISI ended up harming the very stakeholders that policymakers purportedly most wanted to help: Chilean workers and consumers. In the mid-seventies, unemployment in Chile surged into the double-digits and a toxic mix of plummeting wages and spiraling costs rendered the most basic of goods such as milk virtually inaccessible for many Chileans. Recently released studies indicate that similar pain could be in store for American workers, estimating that U.S. job losses from steel/aluminum and automobile/auto parts tariffs could total nearly 470,000 and 157,000, respectively. 

Despite taking measures to wall off the U.S. economy from imports, the Trump administration maintains that it will prioritize U.S. exports as a source of growth. But here again Chile’s experience with ISI offers a cautionary tale of the damage that protectionism and a high tariff regime can wreak on an export sector. Chile’s protected industry, sans competition to drive innovation and reduce costs, developed inefficiencies that rendered it incapable of competing on a global stage.

Fortunately for Chile, we know how the story ends. In the eighties, Chilean policymakers cast off the burden of ISI to pursue market-oriented reforms that eliminated protectionist trade barriers and encouraged foreign investment. A Chilean export sector that was virtually non-existent in the era of ISI now accounts for one-third of the country’s GDP.

Chile has free trade agreements with more than 40 countries that are the foundation not just of this export machine, but of robust foreign direct investment in-country that has enhanced competitiveness of domestic goods and services providers and created tens of thousands of local jobs. 

When the U.S. opted to withdraw from the most ambitious FTA ever negotiated, the Trans-Pacific Partnership, Chile took the lead in reconvening the agreement’s remaining 11-members based on the priority Chilean leaders place on access to an Asian marketplace that will boast nearly two-thirds of the world’s middle class consumers by 2030. It’s the same philosophy that’s helped Chile attain the highest GDP per capita (PPP) in Latin America.

Given this record of nearly 40 years of growth and achievement bestowed by free trade, Chileans won’t soon permit their leaders to return to failed, self-destructive policies from a bygone era.

So the question we Americans need to be asking ourselves is: Why would we? 

About the Author

About the Author

Senior Vice President, Americas