Lessons for Kenya in Trump’s trade policy missteps

US President Donald Trump’s latest foray in unchartered territory, the tariff imposed in March 2018 on steel and aluminum imports, is a quick unprecedented own-goal.

The costs to US and the global economy will run into billions of dollars in a brewing trade war. Retaliations are being calculated by various trading partners.

Tariff protection is crammed with lessons for emerging economies. Trade policy advisers must choose wisely between the true analyses of their craft and politicians whose collapsing performance ratings seek it, searching for votes. The latter un-blinkingly dupe an unsuspecting public, yet unleash harm to the domestic and global economy.

In the US case, Trump’s ruse is to dangle jobs and incomes in domestic manufacturing, eyeing retention of the Rust Belt votes he received in the last election. Sycophantic advisers economical with truth and hard analytics thought they won the day simply by having the President’s ear over a respected pro-growth economist, the Chief Economic Adviser, Gary Cohn, who resigned.

My work, really, as an economist is to try to provide the underlying analytics that confirms his (the President’s) intuition. And his intuition is always right in these matters.

The posture is alarming. It avoids analysis, factual thinking and it is blind to the effects of US structural fiscal reforms that only recently combined tax cuts and increased budget deficits.

That pact alone will generally increase the trade deficit. America’s trade gap of about $500 billion was the doubtful basis of the new tariff. Why doubtful? Because protectionism will hardly reduce it, even if other countries do not retaliate in the impending trade war.

The gap of $500 billion equals about three per cent of US GDP, while imports are 15 per cent of GDP. To close the gap, US would have to divert three per cent of GDP in import demand to domestic production. This is the carrot which Trump dangles to US workers (read voters) and steel and aluminum industries.

Were the US to occupy Kenya’s economic space of a small open economy, facing given world prices, with high unemployment and excess capacity in manufacturing, the move would help fill the gap, with significant domestic benefits to incomes, skills, capacity, all without stoking inflationary pressures and inducing CBK’s Monetary Policy Committee to raise interest rates to contain inflation: it’s called accommodative monetary policy.

There could thus be some positive cases for protection in Kenya. Employment could go up by about three times the rate of increase in new output, by about 1.5 per cent.

Not in the US. If the economy is near full employment (as in the US) protection and expansion by three per cent of GDP stokes inflationary pressures that attract the Fed’s monetary policy tightening. This drives up interest rates.

Poorly understood by the intended beneficiaries in the Rust Belt waiting to vote for Donald Trump if he delivers jobs and incomes, his dream of improving the trade gap begins to unravel.

The wheels come off as follows: the rise in interest rates first squeezes interest-sensitive sectors, making them less competitive globally.

The hidden follies of instinctive tariff protection described above have been exposed widely by trade economists.

READ: Protection of cars, dairy blocks EAC trade deal with south Africa

Back in the 70s and 80s, when most developing countries were trying to promote manufacturing with tariffs and import quotas, they hit the sobering wall of effective protection.

In its maths, the effects of tariffs depend on the whole structure of tariffs chain. If you imposed, say, a modest tariff of 15 per cent on cars but none on imported auto parts, the effective rate of protection for auto assembly could easily be in the hundreds of per cent. Why? Let’s give an example in a case of protecting the shoe industry in Kenya.

Supposing shoes use one tradable input to produce (leather). Let both shoes and leather be imported into Kenya.

Suppose that in the absence of any tariffs, shoes use Sh10,000 worth of leather to make, and shoes sell for Sh15,000 in the international markets.

Shoemakers around the world add Sh5,000 of value. If Kenya imposes a 20 per cent tariff on shoes to grow the industry, but no tariff on leather, shoes would sell for Sh18,000 in Kenya, and the value added for the domestic shoe maker would increase by Sh 3,000, from Sh5,000 to Sh8,000.

As in Kenya’s cases above show, a country has to think through its tariff structure carefully. Yet Kenya may want to see its own shoes on its over 40 million feet- it has the market. It may want to fight rampant unemployment of school leavers, youth and women and raise GDP growth.

It may want to protect infant industries from the competition of low-priced imports of the mature and well-established industries of the developed industrialised countries.

Anti-dumping measures may justify protection- dumping is a form of price discrimination when producers of a country sell goods in another country at lower prices than prices charged at home.

But sycophantic economic policy advice to nurture a rising star with the President is not one of the justifications.

Mbui Wagacha, senior economic adviser at the Executive Office of the President.