8 March 2018

The First Shots in a Global Trade War

The announcement by United States President Donald Trump that the US would impose steep tariffs on all steel and aluminum imports, and the subsequent reactions by many of the US’ leading trading partners, have sparked fears that the world is on the brink of a global trade war that could bring an end to the recent run of solid economic growth around much of the world.  Of course, for those paying attention to the statements coming out of Washington in recent months, this move was little surprise, as the US president and many members of his cabinet have been warning that such tariffs were inevitable.  Moreover, protectionism, and support for political leaders and parties that back protectionist policies, have been on the rise in many corners of the world in recent years.  Elections over the past couple of years, as well as the actions of totalitarian governments that don’t have to face their electorates, have all pointed to a marked increase in support for protectionist policies from voters and governments on both the right and left of the political spectrum.  This has fueled support for right-wing and left-wing populist politicians and has made the threat of a global trade war a growing risk to economies all around the world.  However, history has shown that protectionism is bad news for the global economy, as no economy in the world is completely able to avoid the negative effects of a sharp fall in trade and investment, no matter what the politicians promise.

Steel and Aluminum: As had been expected for some time, President Trump announced plans for the United States to impose a 25% tariff on all steel imports into the US, as well as a 10% tariff on all aluminum imports into the US.  While these measures were aimed, to some degree, at China and the large US trade deficit that the US has with that country, a number of countries will be negatively impacted by these tariffs.  In fact, no country accounts for more than 17% of all steel imports into the US, although the leading steel producers in the Western Hemisphere such as Canada, Brazil and Mexico will bear the brunt of these tariffs.  As for aluminum, one country, Canada, accounts for nearly 50% of all of the aluminum imports into the US, with China placing a distant second.  This highlights the fact that these planned tariffs will harm the US’ closest trading partners to a much greater degree than they will harm China, who appears to be the target of these tariffs.  In fact, that Canada and other neighbors of the US would suffer the most from these tariffs later prompted President Trump to indicate that he might exempt these countries from the planned tariffs. 

The Next Steps: As the Trump Administration moves ahead with its plan to impose these tariffs on steel and aluminum, the world is waiting and watching to see what the next steps will be.  Much of this attention is focused on China, as, while that country will not be the one that is the most impacted by these tariffs, it is the country whose trade surplus with the United States that is the driving force behind this move by the US president.  However, whereas once China would have been extremely vulnerable to a trade war started by such a giant export market, today, China’s increasingly-diversified economy shields it from much of the impact that punitive tariffs would have on its economy.  Meanwhile the world will also be watching the reactions of the US’ neighbors, particularly Canada, the country that will suffer more from these tariffs than any other if they go into effect.  Furthermore, other large economies are also likely to react, both in terms of imposing tariffs on imports from the US and in terms of protecting their own markets from steel and aluminum imports that might have otherwise gone to the US.  In fact, the real danger stems from the potential snowball effect that would see country after country imposing one tariff after another on imports in a tit-for-tat trade war that could lead to a major reduction in international trade.

No Winners in a Trade War: It is clear that, should a full-blown global trade war erupt, there will be no winners.  Perhaps a few segments of the population in certain countries will experience short-term gains, but these will eventually be overtaken by the negative impact of major disruptions to the system of international trade and investment that has dominated the world in recent decades.  For example, while the United States is far less vulnerable to the impact of a trade war than its trade partners who are much more dependent upon exports to generate growth, many sectors of the US economy, particularly many of its fastest-growing services and industries, derive much of their growth from exports while also employing international supply chains that would be severely disrupted by such a trade war.  Meanwhile, those large economies (Germany, South Korea, Mexico, etc.) that generate more than one-third of their total GDP from exports, such a trade war would have devastating consequences for their prospects for economic growth.  Therefore, how the world reacts to the opening salvo that was fired by the Trump Administration will be the key to how this situation plays out, as the US has already signaled that it will dramatically raise the stakes should its trade partners impose retaliatory tariffs on imports from the US.  As a result, the world is on the brink of the very type of event that economists have warned could trigger a major economic downturn and disrupt the activities of many leading businesses and industries.