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April 26th, 2016, NEW YORK, NY (Updated from April 11th)-
Fervent anti-free trade rhetoric dominates the U.S. Presidential campaign on both the Republican and Democratic side, raising the risk of increased protectionism, according to Kathy Bostjancic, Head of US Macro Investor Service, Oxford Economics. “Using our global economic model, we estimate that imposing high trade tariffs on China and Mexico and likely retaliatory tariffs would lower both the level of real GDP by 1.6% and employment by 1.4 million by 2020, than we otherwise forecast. Sharp increases in tariffs would push the inflation rate up to 3.5% by 2020.” In an updated research briefing, Bostjancic notes the following:
• Tapping into the electorate’s rising disenchantment with free trade, the top presidential candidates are voicing protectionist trade antidotes. These include extreme mercantilist measures in which the leading Republican candidate Donald Trump calls for levying 45% and 35% tariffs on China and Mexico, respectively, and Democrat Bernie Sanders advocates ripping up existing US free trade agreements. However, even the more moderate views include objection to the current Trans-pacific Trade Partnership (TPP) agreement that is up for Congressional approval.
“While within a country there will be segments that are adversely affected by increased foreign competition, overall increased trade activity lifts countries’ prosperity as indicated by the Heckscher-Ohlin model,” says Bostjancic. ” Additionally, according to Ricardian theory, a key tenet of free trade, a country exports goods or services for which it has a comparative advantage relative to other countries. This specialization eventually lifts the aggregate prosperity of all countries engaged in free trade. The experience from the 19th and 20th centuries amply confirm this; and also clearly show how damaging protectionism is,” she said.
Bostjancic also highlights the following in the report:
• The benefits of free trade are widely dispersed, while the costs are highly concentrated. Further, recent empirical evidence shows that the negative impact on affected workers is greater than theory suggested. These negative externalities of free trade fuel the populist backlash.
• However, the benefits of free trade still outweigh the costs; thus, increased trade protectionism would stifle U.S. economic growth.
To receive the comprehensive research briefing, please contact Kathy Bostjancic, Head of US Global Macro Service, Oxford Economics, at +1 646 503 3066; Mobile: +1 917 580 1909 or email:[email protected] .
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