"America first!" was the slogan US President Donald Trump used to announce a turnaround in American foreign and trade policy. How would looming economic isolation impact the American economy and the rest of the world? New simulation results show: protectionism in international trade is a loss-making venture.
Since Donald Trump was elected, there has been a growing risk of US trade policy increasingly relying on protectionist measures. The aim of this isolationist policy is to secure jobs and income at home. In reality, however, higher import duties and other import obstacles would mean that weakening of international trade triggered by the US would incur a loss of income worldwide, especially in the US.
In the worst-case scenario for the United States, annual US economic output would drop by 2.3 percent in the long term. In today's terms, this would result in a loss of gross domestic product (GDP) to the tune of USD 415 billion. This is the key finding of a recent study by the ifo Institute on our behalf.
Revamp of the North American Free Trade Agreement would be harmful to the US
Even the reintroduction of tariffs and non-tariff trade barriers, for example technical requirements, documentation obligations, etc. in the North American free trade zone, which includes the United States, Canada and Mexico, would damage the American economy. In the long term, real per capita income in the US would fall by around 0.2 per cent, or USD 125. In Canada alone, the annual loss of income would be just over 1.5 per cent, or around USD 730 per inhabitant. Related losses in annual GDP would be about USD 26 billion in Canada and USD 40 billion in the US.
Many other countries could, however, benefit from a decline in trade between the US, Canada and Mexico. Germany's annual exports to the US would increase by around 3.2 per cent or USD 4.4 billion according to calculations. At the same time, long-term per capita income in Germany would grow by almost 0.03 per cent or USD 12. This would correspond to GDP growth of USD 1 billion.
Protectionist trade policy in the US would also reduce US exports
Greater economic damage would occur if the US were to apply a protectionist trade policy towards all trading partners. If the US were to increase both tariffs and non-tariff trade barriers for imports from the rest of the world by 20 per cent, US exports to most individual countries would in turn fall by 40 to 50 per cent, due to the decrease in US industry's competitiveness accompanying tariffs and barriers.
This would lead to a decline in the long-term annual per capita income of 1.4 per cent or about USD 780 in the United States. American GDP would drop by about USD 250 billion. In Germany, the corresponding loss in annual per capita income would be around 0.7 percent or USD 275. This would amount to a reduction in GDP of USD 22 billion.
Countermeasures by other countries would lead to high losses
If the other countries were to react to US protectionism with the same measures against the US economy, income losses would continue to rise. Assuming that all other countries were also to increase their tariffs and non-tariff trade barriers against US products by 20 per cent, this would significantly restrict trade between the United States and the rest of the world. The drop in US imports – depending on the country – is calculated as being 50 to 60 per cent. US exports to other countries would actually fall by 70 per cent or more.
The result would be substantial losses in income: in the US, real per capita annual income would fall by 2.3 per cent or USD 1,300 in the long term, and in Canada by as much as 3.85 per cent or around USD 1,800. For Germany, a loss of in-come of 0.4 per cent or about USD 160 per inhabitant would be expected. The long-term annual GDP losses in Germany would reach USD 13 billion, in Canada nearly USD 65 billion and in the US around USD 415 billion.
For our chairman and CEO Aart De Geus, these results are a clear argument against any form of protectionism:
It should be noted that in all of these results, the simulation model used does not take into account any dynamic effects and the parameters used are conservative in nature. Therefore, these results represent the lower limit of the long-term effects of a protectionist US trade policy on income and production.