President Donald Trump has long been keen to defend workers from the “carnage” of “bad trade deals.” To that end, President Tramp signed on 8 March 2018 an order that imposes tariffs on steel and aluminum imports from all foreign countries, while carving out an exception for Canada and Mexico for now while North America Free Trade Agreement (NAFTA) negotiations are under way. President Tramp, joined by steel and aluminum workers, signed a companion proclamation, one on steel and one on aluminum, institution a tariff of 25% on steel and 10% on aluminum imports.
President Trump a lso threatened the European Union (EU) with trade barriers on automobiles and could take even more measures on intellectual property rights and technology goods. It is more plausible than not that this is the beginning of a costly tit-for-tat whereby United States trade protection will be countered by others. The EU for example warned the United States not to take such measures.
To this effect, EU Trade Ministers agreed at a meeting on 27 February 2018 that they would respond with counter-measures if the United States brings in import tariffs on steel and aluminum. Matthias Machning, German Deputy Economy Minister stated that the introduction of tariffs on steel and aluminum by the United States is incompatible with the World Trade Organization (WTO) rules and unjustifiable on national security grounds.
The bad news is that a fully-fledged trade war would create serious economic damage. Recent estimations by Ralph Ossa from the University of Chicago indicate that a global trade war, resulting in a rise in trade barriers for all countries, would slash real incomes by an average 3.4%. At the global level, this would correspond to a loss of almost one full year of growth efforts. Ralph Ossa argued that, President Trump’s such move is surprising in that it will negatively impact the United States economy, although the extent of harm would be limited to the loss of jobs in the user industries of the protected sector.
According to Ralph Ossa, this can be illustrated with the case of the United States steel safeguard tariffs between March 2002 and December 2003. Back in 2002, mounting competitive pressures on the steel industry led President George W. Bush to impose safeguard tariffs ranging between 8% and 30% on ten steel product groups, with a total of 272 tariff lines. Steel imports from NAFTA countries, from other preferential trade agreement parties (Jordan and Israel) and from 100 developing countries were exempted. Moreover, around 1,000 firm-specific exemptions were granted by the United States Trade Representative at the time.
Dr. Agnieszka Gehringer, a Senior Research Analyst at the Flossbach von Storch Research Institute stated that, as a result of trade restrictions, United States imports of steel products declined by 5% between 2002 and 2003, bringing the steel industry’s trade deficit down by 28%. However, immediately after the protection ended, import growth rebounded and contributed to a rapid widening of the industry’s trade deficit, above the levels from pre-protectionist era.
The protection of the steel industry produced negative spillover effects to other parts of the United States economy. Steel is a key input in several industries, among others manufacture of basic metals, manufacture of fabricated metal products, manufacture of electrical equipment and manufacture of machinery and equipment not elsewhere classified. Taken together, the steel-using industries generated in 2001 far more value added than did the steel industry itself and employed 57 workers for every employee in the steel industry.
According to Dr. Agnieszka Gehringer, nine WTO members (Brazil, China, Chinese Taipei, the EU, Japan, Korea, New Zealand, Norway and Switzerland) opposed the safeguard measures in the WTO. It was found that the safeguards violated WTO rules by failing to show a “causal link” between increased imports and “serious injury” on the United States side. Also, the United States government did not provide comprehensive and appropriate evidence of “unforeseen developments” of steel imports explaining their increase.
Due to the continuation of non-compliance of the United States with the WTO ruling, the EU was authorized to raise retaliatory tariffs on United States goods. It targeted, among others, citrus fruits and textiles, with the aim to build up internal opposition to the United States protectionism among various United States industries. Safeguard measures on steel were eventually terminated by the United States in December 2003.
Dr. Agnieszka Gehringer further noted that there should be no doubt that unfair trading practices undermine the harmonious functioning of the global trading order. But the WTO’s dispute resolution has exactly the aim to assist discordant trading partners in a peaceful resolution of trade tensions. As a matter of fact, the United States enjoys an above-average success rate in disputes that have been decided at the WTO since its foundation in 1995. At the same time, some WTO rules might be indeed outdated and could be renegotiated to better reflect the changing nature of trade today.
Finally, as Ralph Ossa said, the lack of an investment treaty between the United States and China adds considerable fuel to the flames. After all, if such an investment treaty existed, it would assure fair access to reciprocal markets for multinationals. It is obvious that President Donald Trump’s protectionist measures and pledges will cause a tit-for-tat trade conflict or at least elements thereof. Smaller muscle flexing with respect to single industries would probably not harm the overall economic picture. However, a fully-fledged trade war would be detrimental to both the United States and its trading partners.
Steve Halle of Birmingham University stated that the current Trump administration’s strategy reflects a false diagnosis of the underlying problem of chronic current account deficits registered by the United States. As long as United States excess consumption is financed by savings from abroad, there is no economic reason for current account deficits to improve. Protectionism only reallocates the deficits among sectors.
Equally significant, Steve Halle noted, under the twin deficit scenario, these trade deficit could get even worse, should the recent major tax cuts significantly worsen the outlook for the United States fiscal balance. With regard to protectionism and trade wars, President Donald Trump should heed the warning of his illustrious predecessor Thomas Jefferson that “the most successful war seldom pays for its losses.”
Protectionism the US trade strategy
Irish relations
Next year, will be the 25th anniversary of Ireland opening an embassy in Ethiopia. The two nations continue to have a strong partnership. Ireland is one of the key donor countries for Ethiopia through Irish Aid. Mostly focusing on sustainable developmental cooperation projects, Ireland continues to provide funding to key endeavors in health, education and agriculture, among others, in Ethiopia. Capital spoke to Sonja Hyland, Ireland’s Ambassador to Ethiopia about the over two decade long friendship between the two countries
Capital: If you could give us a briefing on the current relationship between Ethiopia and Ireland.
Sonja Hyland: Next year will be the 25th anniversary of opening our embassy and the 25th anniversary of the partnership we have with the government and people of Ethiopia in relation to development cooperation.
We opened an embassy here in 1994 and from the beginning invested quite heavily in a partnership with Ethiopia especially around development priorities; the health sector, education sector, social protection, gender issues, livelihoods and agriculture and that sort of range both in terms of basic public services for citizens and also in terms of rural livelihoods and agriculture in the productive sector, particularly the rural agriculture sector.
Our partnership has grown obviously, now we have partnerships in the cultural area, beginning in areas of trade and investment, we have an air link; there is now a direct flight to Dublin. So it is a partnership that has grown beyond the initial partnership which was based on developmental cooperation, but we do still have a very strong developmental cooperation here which is the largest one we have in the world.
We spend about 30 million Euros which is about one billion birr a year with government, UN and NGO partners in support of social protection, health, gender issues, governance, rural livelihoods and agricultural development.
Capital: What about looking at investment relations; that is something Ethiopia is looking for as well.
Hyland: We have had some interest from Irish companies, I would say it is relatively modest interest at this stage because Ireland is relatively a small domestic market; we are four and a half million people. So we are not a huge economy, but having said that we have very successful multinational companies.
One of the things everyone knows about Ireland is it is one of the largest recipients of US foreign direct investment on per capita terms but the thing people don’t know is that Ireland is actually the 9th largest investor in the US as well. So we actually do have quite a few companies that are of a size and a scale that can invest abroad.
I would say that markets in Africa are underrepresented in terms of Irish companies because I think most Irish companies which have grown first into a European market then to the States, Australia, and beginning in Asia quite a lot now, and Latin America starting. There is a strong interest in a number of African markets, but it is not somewhere that has been fully explored by Irish companies.
Having said that we do have some investments from mobile technology companies; M-Birr for instance which is a money transfer system by a French-Irish company, we have some Irish companies in the agribusiness sector as well, we have had interests in the manufacturing sector.
I think it is definitely a relationship that needs to develop further and one of the things we have been talking about with the government whether we might share our experiences on attracting foreign direct investment because as I said we are one of the most successful countries in the world in terms of attracting foreign direct investment and that has to do with a whole range of issues with the regulatory environment, education and skills, the taxation environment, governance; all sorts of issues that have added up to make Ireland an attractive prospect for FDI.
Capital: Looking at development cooperation, there is Irish Aid which has been a partner for development for a long time now. How strong is that partnership right now?
Hyland: This year we will be spending 30 million Euros in Ethiopia on a development cooperation program and that is part of a strategic commitment between 2014 and 2018 of a 130 million Euros overall; so this is the final year and it is 30 million Euros.
The humanitarian element has unfortunately grown in the last couple of years. When we started our current strategy in 2014 we didn’t envision much at all on the humanitarian side but now because of the last three consecutive years of drought and because of the conflict between the Somali and Oromia regions, we have been forced to adjust some of our spending to put more in the humanitarian basket.
We have just announced that we will provide the government with three million Euros following the launching of the Ethiopian Humanitarian and Disaster Resilience Plan; that is a commitment we take seriously.
Capital: It is also mentioned that there needs to be a sustainable way of addressing issues instead of depending on material aid. What has Irish Aid done to archive that?
Hyland: I think all our programs are focused on exactly that which is basically sustainability and reaching development gains and priorities the government has set in a way that is sustainable. For example the social protection and Productive Safety Net Program (PSNP) we are one of the key donors in that, we are actually the chair of the donor group this year for PSNP.
It is exactly one of those programs which is the key to breaking that cycle of humanitarian crisis by supporting them in a way that allows them to improve their productive capacity and graduate from the PSNP program; that is our biggest investment from the 30 million Euros a year, 10 million goes to PSNP.
Similarly in the health sector what we are doing is helping to strengthen the national health system so again we are not building our own clinics or bringing our own doctors. The support goes into a pool of funding for the Ministry of Health to deliver on the priorities that has been set by Ethiopia.
Agriculture and rural livelihood is a key piece of the resilience strategy in any country. In Ireland we have the experience; initially we were subsistence farmers like many people in Ethiopia are now and we moved through that to a more productive agricultural economy and now we are one of the biggest agricultural exporters per capita in the world.
Our agricultural support even in the last seven years went up by 60 percent and so we have not only increased in volume but really increased in value addition. This is something we would like to share with Ethiopia as well, and while the our embassy will be here for a long time, Irish Aid over time will not be here because it will not be needed. For that reason our programs are focused on sustainable development, resilience and basically alleviation out of poverty.
Capital: One of the biggest issues for donor countries is that there is shortage in funding due to many humanitarian crises, how are you dealing with that? What about the issue of accountability?
Hyland: We have put a larger percentage of our development funding into humanitarian aid, we have to do that because we have to meet immediate needs, but at the same time, you don’t want that situation to continue forever because you are in a situation where you are not investing in development and resilience and a long term future.
Accountability is always an issue in a humanitarian context because by definition it is always a crisis, it’s always a confusing situation that involves a significant displacement of people so I guess what we try to do is work with the government, with the UN and NGOs to make sure they have robust accountable systems in place and have a dialogue with the government on how important that accountability is.
Capital: Ethiopia is currently implementing a State of Emergency. What is Ireland’s thought on this?
Hyland: You probably saw the EU statement and Ireland is part of the EU and part of that statement and we would associate ourselves with that.
From our perspectives what we see in Ethiopia is that there is a significant demand from Ethiopians for political reform. The government and the current Prime Minister, when the first State of Emergency was announced, committed very openly and publically to reform and back in January again the EPRDF made a very clear statement around understanding the pace of reform was not enough and further reform needed to be prioritized and more rapidly implemented. We agree with that.
The State of Emergency, again we would associate with the EU statement; we don’t necessarily see that as a helpful element in demonstrating commitment in political reform and economic reform. At the end of the day it is the decision of the Ethiopian government but from our perspective, we feel that a more rapid implementation of economic and political reform would be perhaps more easily done without the State of Emergency.
Capital: On a lighter note, we have heard that a famous monument in Addis Ababa was lit up in green, tell us about that.
Hyland: This is a campaign called the Global Greening Campaign, it started in 2010 globally and it started small, maybe 20 to 30 monuments around the world going green on Saint Patrick’s Day which is our national day and green is the national color of Ireland.
The idea is to highlight Ireland on Saint Patrick’s Day by lighting up monuments in green in reminder of Ireland, Irish culture and heritage, tourism possibilities in terms of coming to Ireland. The second thing it highlights is our long standing friendship with many nations.
In case of Ethiopia this year we decided to green the lion in front of the National Theater. The reason we chose the lion is because it is an all Ethiopian symbol and the symbol of Addis Ababa so we thought it would be a good monument to green to demonstrate the partnership between Ethiopia and Ireland.
Roman Rediet
Name: Roman Rediet
Education: BA in Accounting
Company name: BO Chocolate
Title: Manager
Founded in: 2017
What it does: Imports and sells Chocolate
HQ: Century Mall
Number of employees: 6
Startup Capital: 3,000,000 birr
Current capital: Growing
Reasons for starting the business: To introduce the business in the country
Biggest perks of Ownership: Makes me happy to see my customers enjoying our service
Biggest strength: Commitment
Biggest challenge: Lack of awareness in the community
Plan: To expand the business
First career: Private business
Most interested in meeting: Successful businesspeople in the world
Most admired person: The one who created me
Stress reducer: Eating chocolate
Favorite past-time: Reading books
Favorite book: Rich Dad; Poor Dad by Robert Kiyosaki
Favorite destination: None
Favorite automobile: None
Free Trade versus Protectionism
Following last week’s article on the raising of tariffs on steel and aluminium by President Trump, it is interesting to look a bit deeper into the issues of free trade and protectionism. I came across an article on www. http://smallbusiness.chron.com by Tom Chmielewski, who sheds some light on these issues.
“With market globalization, industrialized and developing nations have embraced free trade as a means for opening markets and reducing consumer prices. Yet it has been reviled by human rights organizations that blame free trade for a critical degrading of workers’ rights and its harmful effects on the environment. The benefits of free trade can hide its unintended impacts. But measures to safeguard against its ills raise the fear of protectionism.
Protectionism is the practice of nations to protect domestic industries and their workers by providing subsidies for their production and imposing tariffs on competing foreign products. Yet protectionism has been blamed for closing off trade from foreign countries, raising prices and giving domestic consumers less choice. A country that practices protectionism can just as easily be subjected to it by other countries imposing their own import tariffs and awarding subsidies to their industries.
Free trade is based on agreements between nations to drop import barriers, allowing foreign goods and services to compete on a level playing field with domestic products. This opens markets for developing countries and in theory improves their economic conditions. Developing companies in turn are more capable of buying products from industrialized countries. Jobs lost in one industry of a developed country can grow in another industry. Free trade is meant to improve the economy of all participating nations. The World Trade Organization (WTO) regulates free trade agreements among member nations.
Although the WTO allows a country to bar certain imports if they pose a threat to the health of its own citizens or environment, the organization does not allow a country to bar imports because of a manufacturer’s poor working conditions. The WTO also doesn’t consider the impact on the environment due to lax regulations and enforcement on manufacturing processes in exporting countries. Critics argue this causes developing countries to “race to the bottom” by allowing cheap labor, and at times child and slave labor, working under “sweat shop” conditions to keep costs down and compete favorably with countries where labor regulations are enforced. Environmental protection can also be sacrificed in poorer countries looking to expand their exports.
The WTO admits the issues of workers’ rights, including elimination of workplace abuse such as forced labor and types of child labor, have become the subject of intense debate in the organization. European and North American countries hope to provide incentives to improve conditions for workers globally while the organization looks to improve trade. But developing countries and, according to the WTO, “many developed nations” resist the idea of the organization becoming involved with local labor conditions. Officials from developing countries call the argument to include provisions on working conditions in trade agreements a “smokescreen” to eliminate the cost advantage of countries where low wages and poor working conditions are common. The only way these conditions improve, these officials insist, is through economic growth.
An article on “Criticisms of Current Forms of Free Trade” published on the Global Issues website points out that free trade encourages the relocation of multinational manufacturing sites from developed countries to poorer nations with much lower costs. The article argues that wealth in a poor country could be created more rapidly if the economy was based locally rather than on a system heavily dependent on exports, with investments and profits of exporting companies in the hands of foreign owners that limit the economic benefits to their workers and the host country.”
I guess these few notes provide some food for thought for all of us trying to engage in contemporary global trade, whether importing or exporting, whether producing or trading, whether doing business or developing policies, rules and regulations. There are always two sides of the coin to consider.
Ton Haverkort
