From political rhetoric to trade policy, trade protectionism has grown significantly since the 2008-2009 global financial crisis. Both developed and developing countries are implementing restrictive new commercial policies to protect their markets despite warnings from the WTO urging members to resist protectionism and “get trade moving again.” Restrictive measures introduced by WTO’s members grew by 11% between 2008 and 2016. Only 25% of those restrictive measures had been removed by mid-May 2016, leaving the total number of restrictive measures still in place today at 2,126.
Protectionism has slowed the recovery from the financial crisis. The 2007-2008 global financial meltdown had been preceded by decades of trade reform that had fueled economic growth. Since then, though, have countries have tightened trade restrictions on trade, leading to “such prolonged weak trade growth… nearly unprecedented in modern history.”
This tendency has increased with the U.S.’s recent trade policy decisions. On March 8th, President Donald Trump announced that, at the recommendation of a Commerce Department investigation of national security and trade, the United States will impose a tariff of 25% on steel and aluminum. To many, the announcement was unsurprising, putting actions behind declarations such as Treasury Secretary Steve Mnuchin’s statement that a “there is always a risk that people reciprocate… but we are not afraid of getting into a trade war.”
Since then, concern over a potential trade war has escalated as the U.S. and China—one of the main exporters affected by the tariff not included in subsequent exemptions—have ramped up retaliatory actions. On April 1st, China increased tariffs by up to 25% on a multitude of agricultural goods produced mainly by the United States. On April 2nd, Trump responded by proposing additional tariffs targeted against Chinese goods. China responded in-kind with announcements of even harsher tariffs against the U.S. auto and industrial sectors.
As the possibility of a U.S.-China trade war appears increasingly inevitable, its implications on the international system are increasingly relevant. On-going research at the University of Southern California Security and Political Economy Lab sheds light on how Latin American countries can use the threat of protectionism to further regional economic integration.
Latin America: Forced into battle
With the potential looming trade war between the U.S. and China, countries that have been exempted from the tariffs may fall into the trap of assuming they’ll be unharmed. But in the context of trade protectionism, directly affected countries are not the only ones at risk. And Latin American countries (especially medium and small economies) are especially vulnerable to a global trade war.
A recent study from the USC Security and Political Economy Lab lays out those risks. The effort studies the impact of the 2008 global financial crisis on trade by examining more than 160 economies and the respective traditional and non-traditional protectionist measures implemented between 2008 and 2017. Our preliminary findings show that countries targeted by protectionist measures in one specific year are, in turn, likely to respond the following year by implementing similar measures. However, these measures are not typically reciprocal, especially if the original sending state is large. Rather, states that are targeted by protectionist measures tend to pass the pain along to new, smaller, players, making the small and medium economies of Latin America particularly vulnerable to a global trade war.
Our prediction of Latin American vulnerability is further supported by the comparative analysis of protectionist policies. As seen in the charts below, from 2009-2017, Latin America implemented 11.5% of global protectionist trade policies and was affected by 12.4 percent. This is in direct contrast to North America, where despite trading in greater volumes than Latin America, implemented 10.1% of global protectionist policies and was only affected by 4.0 percent.
Source: GTA dataset combined with USC SPEC Lab’s Trade Policy Project database between 2009 and 2017.
Opportunity for integration
Fortunately, Latin America has options for countering the potential consequences of the impending trade war. One answer lies in a more strategic regional economic integration.
Most recent efforts within Latin America, such as the Union of the South American Nations (UNASUR), have focused primarily on political and social issues. Furthermore, the more than 30 regional trade agreements, under which 80% of trade in Latin America occurs, all have different operating rules, drowning the trade of intermediate goods and the opportunity for growth of regional global value chains.
Now is the time for Latin American countries to harmonize their existing preferential trade agreements, to strengthen regional and global value chains, and to increase intraregional trade, taking the impending threat of global protectionism as motivation for “convergence in diversity.” Some countries in the region have a head start; integration has begun to materialize in movements such as the Pacific Alliance and Mercosur, which are trying to facilitate competitive regional value chains and strengthen Latin America’s global value chains.
But more can be done, such as encouraging a regional Trade and Economic Summit of Latin America and the Caribbean, which would show a unified regional intention to work toward harmonization of trade rules to be better positioned collectively to respond to global trade challenges. Such a summit would need to would consider that the divergent patterns of integration of Latin America and taking those into account find ways to rethink and harmonize trade, economic and political integration to make it more coherent and dynamic vis à via the global economy.
In sum, this new global trade landscape provides an opportunity to face old but relevant challenges in the Latin America. By harmonizing the rules of existing trade agreements, Latin America can escape the trap of the emerging tit-for-tat protectionist emerging in the global economy using them instead as a way to promote the region’s competitiveness and Latin American participation in global supply chains.
Nicolás Albertoni is the USC SPEC Lab’s Trade Policy Project Lead. He is a Fulbright-Laspau Scholar at University of Southern California pursuing a Ph.D. in political science and international relations.
Shir Attias is a Trustee Scholar at the University of Southern California. She is pursuing a double major in International Relations and Political Economy and serves as a Research Assistant for the Trade Policy Team at the USC Security and Political Economy (SPEC) Lab.