In a tit-for-tat trade war, no one wins

The Dow marked its fifth-largest point decline in history on March 22, plummeting 724 points or 2.9 percent in response to growing concerns among investors about a global trade war. In early March, the Trump Administration used national security reasons to announce tariffs of 25 percent and 10 percent on steel and aluminum respectively, hurting trade relations with the United States’ closest allies including Japan, South Korea, and the European Union, as well as Canada and Mexico.

Adding fuel to the impending trade war, Trump then announced proposed tariffs of $50 billion on Chinese imports in retaliation to an unfair trade balance with China and China’s theft of U.S. technology. The hostile rhetoric from the United States has caused backlash from the World Trade Organization (WTO) and has raised concerns around the world. The biggest fear of a trade war is an uncontrollable spiral of tit-for-tat among countries, defying current trade systems and pushing countries to more protectionist behaviors.

The Trade Partnership predicts that steel tariffs will kill 146,000 American jobs. The role of the tariffs is to restrict access to cheap foreign steel and aluminum and increase the price of domestic materials. As a result, for instance, domestic steel-producing jobs may be saved at the expense of domestic steel-using jobs; companies using steel would be forced to consume the price delta and find reductions elsewhere.

Moreover, on the proposed tariffs on China, the United States is attempting to address grievances about unfair technology transfers, such as illegally obtained and unlicensed American technology in China. In addition, China has a $375 billion trade surplus with the United States and has stalled in correcting the trade imbalance. As a result, Forbes expects four types of Chinese imports to be vulnerable to trade restrictions: consumer electronics, tires and rubber, automotive, and machinery. However, given that the two superpowers’ economies are heavily entwined, any impositions on an industry will have a side effect on American businesses.

Playing the national security card on steel and aluminum tariffs is a weak attempt to cover the United States from full-out noncompliance with WTO rules on tariffs. The United States has invoked Section 232 of the Trade Expansion Act of 1962, which “authorizes the Secretary of Commerce to conduct comprehensive investigations to determine the efforts of imports of any article on the national security of the US,” according to the Commerce Department.

After an investigation on imports, the Commerce Department found that the underperforming metals sector “posed a risk to US national security,” according to the Foreign Policy. In a nutshell, Trump has decided to protect the United States from an over-reliance on foreign steel and aluminum in fear that the country would be left without sufficient materials to develop military resources. The real reason is to help domestic steel and aluminum industries as the United States faces unfair competition and artificially low prices. In a tweet from March 2, Trump wrote in all caps, “If you don’t have steel, you don’t have a country!”

The impression that job losses in certain industries can conjure a national security flag threatens to undermine current trade systems.

In response to possible tariff impositions on China, for instance, the Asian country has proposed possible retaliation, including on U.S. soybean imports. China is the largest trading partner for American soybean farmers and buys 57 percent of all exports in a trade worth between $10 and $14 billion, according to the Independent. The American Soybean Association, representing 21,000 soybean producers, stated that “retaliation by China will cost farmers their livelihoods.”

Furthermore, the tariffs would unwind years of U.S. efforts “across a range of issues by surrendering our trade strategy to a reciprocity of hypocrisy,” according to the Foreign Policy.

While likely to face consequences at the WTO, the United States would also set an undesired precedent for other countries that may not be US allies to take up the national security reasoning to create trade imbalances. The reality is that tough tariffs will cause retaliation and have unintended consequences for other countries, leading to more protectionist actions. In a tit-for-tat, there are no winners.

History seems to have no spot for the present. The United States forgets that the outbreak of protectionist policies led to the Great Depression. Other examples of trade wars, including that between France and Italy in the early 1890s, show that countries always retaliate.

A trade war between two superpowers poses significant externalities for other trade partners and, in the least, will put American allies in an uncomfortable position.

As China and the Unites States hesitantly begin negotiations after loud threats, the world will be watching carefully—but it’s too soon to breathe a sigh of relief.

Leave a Reply

Your email address will not be published. Required fields are marked *