Tariffs: Job Protectors or Trade Killers?

UNCTAD

Luz Maria de la Mora, the Director of the International Trade Division at UNCTAD, is responsible for producing the Global Trade Update.

Earlier in her career, she was part of Mexico’s negotiating team that brokered the North American Free Trade Agreement (NAFTA) in 1992, the legacy of which is still disputed to this day.

She explained to UN News that tariffs themselves are not necessarily a problem: the issue is the uncertainty that results from big economic players ripping up the playbook of international trade rules.

Luz Maria de la Mora: Tariffs, which are essentially a tax on imports, have been part of an international trading system that has been in place for almost eight decades.

First, there was the General Agreement on Tariffs and Trade, also known as GATT, in 1948, and this was replaced by the World Trade Organization (WTO), in 1995.

These organizations basically created a set of rules, giving certainty to producers, investors and exporters that tariffs wouldn’t change every year.

Tariffs are used widely, but they are imposed following rules that have been negotiated within the WTO or regional organizations.

UN News: The biggest tariffs are between developing countries. Why?

Luz Maria de la Mora: Developing countries normally tend to have higher levels of protection, and there are several reasons. One is that you may want to develop a certain industry in the automotive or chemical sector.

One way of helping an industry develop and grow is by protecting it, through tariffs, from foreign competition. The downside is that production of those goods for the domestic market is more expensive, and you may also deter competition.

© ILO/BMF Media | Workers sort through peppers in a processing plant in Mexico.

A second reason why developing countries apply tariffs is that there are instances in which governments need revenue. Tariffs are a tax, and a tax is income that a government can spend on social spending, health, education or infrastructure.

But again, this means higher costs on imported goods for consumers.

UN News: You were heavily involved in the North American Free Trade Agreement [between the United States, Canada and Mexico]. What did it achieve and why was it controversial?

Luz Maria de la Mora: NAFTA was a very daring proposition at the time for several reasons. It was the first free trade agreement between developing and developed countries, an experiment that had never been tried before. Practically all tariffs between the three nations were eliminated.

NAFTA transformed Mexico’s economy. There was more investment in the manufacturing sector, and many jobs were created.

Today it is a world-class sector, and Mexico became the fourth largest producer of automobiles worldwide. It proved that integration can make your economy more efficient and it can create more opportunities.

UN News: Those who criticize NAFTA say that the reduction in tariffs meant a reduction in protection for certain sectors and there were workers who lost out. Are you saying that ultimately workers benefited in each country?

Luz Maria de la Mora: Of course, in every free trade area, there are always winners and losers. I’m not saying that everything was rosy, and some sectors and companies ceased to exist.

But the transformation that you see in those regions and areas of the country that were able to integrate into the North American supply chain has really been very, very encouraging. In the big picture, you can see that there has been a positive effect.

But trade policy has to go hand-in-hand with policies that ensure those who lose out can be trained. You need to have some kind of government intervention to be able to maintain people in the workforce.

© ILO | A worker at a factory in Zhejiang, China prepares wood for export.

In Mexico, for example, there were a lot of support programmes in the agricultural sector, to help producers face competition from the United States and from Canada.

They also started producing more in the fruit and vegetable sector, which basically in Mexico did not exist before, and today the country is the number one exporter of tomatoes, avocados, berries and some other fresh produce to the United States.

This has helped the U.S. consumer to have a more balanced and healthy diet as a result. Conversely, Mexico benefits from easy access to grains, wheat, corn, sorghum and also some kind of beef, pork and poultry.

UN News: We’re talking at a time when many international trade agreements are being questioned. Do you think that we’re on the verge of a global trade war?

Luz Maria de la Mora: Many important actors in global trade, such as the United States, the European Union and China, are imposing tariffs or measures that are not always in line with their commitments in the WTO.

That is creating uncertainty and uneasiness on the part of the private sector, because when the big actors start making their own rules, instead of following the rules of WTO, questions are asked: why are they doing this? Why are they not using the system and the rules that we have in place to address their problems?

There have always been differences among countries, with certain sectors more affected by changes than others, and economic conditions can require certain kind of interventions.

When Member States make unilateral decisions, without going through the WTO or UN System, it can create uncertainty, which may end up creating a slowdown in investment decisions in the private sector, in trade, economic growth and job creation.

UN News/Daniel Dickinson | Communities in developing countries like Madagascar rely on exports, such as lobster, to survive.

UN News: If we do see a slowdown in the global economy, who is likely to suffer the most?

Luz Maria de la Mora: Developing countries. Ninety-five developing countries depend on their exports, which puts them at the mercy of international pricing trends and on the growth of the global economy.

These countries need an international trading system that works, that offers certainty, where they know which regulations they face and where the rules are not changed without notice, without negotiation, without any previous warning of what is coming.

That is why it is so important that multilateralism remains in place.