The Rise of Protectionism: Why Bet on a More Closed World?
Since the end of World War II, the United States has relied on free trade as the engine of its prosperity. Globalization flourished, and the trading system was institutionalized based on the principle that global exchange is a win-win game, allowing collective benefits to be reaped.
President Trump, however, holds a radically different view, believing that the world has progressed at the expense of U.S. interests. This shift from liberal economic order bets on a policy based on economic nationalism: restricting the entry of foreign products to favor domestic production and “Make America First.”
The realization of Trump’s vision faces the reality that we live in a highly interconnected world. Many industries rely on complex global supply chains. Thus, restricting trade through tariffs can multiply costs for local businesses, affecting their competitiveness and job creation.
A Hit to the Family Budget
Tariffs, essentially, are a tax on imports, and their effect trickles down to the price of raw materials, intermediate goods, and final products. A kilogram of Argentine beef, a Mexican washing machine, or a Japanese car could become more expensive for businesses and consumers.
This impact is particularly severe for middle and lower-income classes, who have fewer mechanisms to protect themselves from significant price fluctuations.
If you think this only concerns U.S. consumers, you’re mistaken. Much of a country like those in Latin America’s domestic production in textiles, manufacturing, or agroindustry depends on imported inputs or machinery. Rising tariffs increase production costs, leading to higher prices for end consumers.
As in the past, once the U.S. decides to use tariffs as the cornerstone of its policy, it inadvertently triggers a trade war, with developing countries bearing the brunt of its effects.
Economic nationalism tends to be contagious, and countries enter a logic of retaliatory trade measures, leading to reduced global exchange and increased prices due to decreased global competition.
Volatility and Uncertainty: Enemies of Growth and Employment
Trade uncertainty acts as a powerful brake on investment activities.
In a volatile business environment, both domestic and foreign companies tend to adopt a cautious stance. Expansion projects are postponed, new hirings are frozen, and strategic plans are reviewed with skepticism.
This defensive behavior isn’t coincidental: when major economies impose tariffs, and countries respond with retaliation, uncertainty about the future of international trade skyrockets.
Effects on Markets
Financial markets amplify this effect. Perceiving greater risks, investors reduce their exposure to assets from emerging countries and seek safer havens. Here lies a paradox: amidst a trade war initiated by the U.S., the U.S. dollar and Treasury bonds strengthen as capital destinations.
This “safe-haven” effect has concrete consequences for developing countries like those in Latin America: every dollar flowing to U.S. assets is a dollar that doesn’t reach the rest of the world.
The result is upward pressure on exchange rates. With fewer dollars available in local economies and increased demand for the U.S. currency, the local currency’s value tends to soar.
This dynamic fosters a vicious cycle: weaker currencies make imports more expensive and increase the cost of external debt, generating more uncertainty and pushing investors further away.
For the average citizen, this translates to higher prices, costlier loans, greater tax burdens—to service a growing public debt—and ultimately, fewer job and economic growth opportunities.
Diversify to Protect Yourself
Behind every crisis lies an opportunity. For instance, the current financial volatility, with market drops, allows access to assets typically out of reach. For those interested in investing—always remembering that investment inherently involves risk—this could be an excellent time to diversify.
Index funds tend to be less volatile, minimizing risks; Treasury bonds offer some assurance, and real estate in stable countries could be a reasonable alternative.
This situation also presents strategic opportunities for businesses and governments. Exporters can explore new markets to reduce trade dependencies, while local businesses can gain competitiveness amid rising import costs.
