US-China Trade War: Can Trump (or Anyone) Bring Back American Industry?

It nears a century since Herbert Hoover, 31st President of the United States, ignored calls from over 1,000 American economists and signed the Smoot-Hawley tariff act of 1930 into law. The act raised 845 tariff rates, and prompted retaliatory tariffs from so many trading partners that the total volume of American imports would fall by 40% in just over two years. Amplified by deflation, the tariff added significant weight to the economic climate of the Great Depression, and directly led to the most notable trade war of the 20th century.

The Smoot-Hawley debacle has held sway in the public economic debate for nearly 90 years; an example of American protectionist policies creating significant global instability. It has been blamed for widespread defaults on foreign debts (as countries that had borrowed abroad were unable to export enough to finance their debts) as well as souring geopolitical relations to the point where Mackenzie King, then-Prime Minister of America’s biggest trading partner, Canada, wrote in his diary that the tariff was equivalent to “border warfare”. In 1993, sixty-three years after the act was passed, in a televised debate on the North American Free-Trade Agreement (NAFTA), former vice-president Al Gore presented his unamused opponent with a photograph of Willis Hawley and Reed Smoot, the two congressmen who sponsored the act and after whom it was named. Leaving NAFTA, Gore argued, would have similar consequences.

Acts like Smoot-Hawley have contributed to a public perception of tariffs and any other kind of protectionist policy as disastrous for all those involved. These brief but well-publicised moments in the history of global trade policy have meant that any announcement of new tariffs is met with warnings of recession and global instability, with the public response to the recent series of tariffs imposed by President Donald Trump (in an attempt to lower imports and shrink America’s current account deficit) as one such example. But is this perception justified?

Protectionists would suggest that, for a developed country like America, tariffs could be used to protect domestic industry from cheap foreign imports by making consumers pay a premium when they opt for the foreign product. This traditional theory seems to have motivated much of the United States’ recent move towards trade protectionism, with President Trump tweeting in June that a 20% import tariff on cars coming from the E.U. would encourage manufacturers to “build them here!” instead.

Unfortunately, the narrative rarely ever ends there. Imposing tariffs on another country’s exports regularly comes with some form of retaliation from that country. In response to the Trump tariffs, Mexico and the European Union (EU) have both promised tariffs of their own on American goods ranging from steel all the way to bourbon whiskey. Some of these ‘revenge tariffs’ are clearly designed to send political messages: bourbon, for instance, is predominantly made in Kentucky, home state of Senate Majority Leader Mitch McConnell. This series of ‘tit-for-tat’ tariffs benefits no-one. And the fallout from such a trade war could hurt other, uninvolved countries, especially in the case of the current trade war between the world’s two biggest economies, China and the United States, where Asian countries that sell raw materials to China that are used to make finished products exported to the U.S. stand to suffer a large fall in exports.

But there is an argument to suggest that, in the case of a global economic superpower like the United States entering a trade war, it will almost always come out on top. With all of the countries that the U.S. has seemed likely to spark a trade war with (Mexico, the EU, and, as seen in figure 1, China) the U.S. has trade deficits with all of them. Because America imports significantly more from these countries than they buy from the U.S., they have far more to lose when trade barriers are erected by both sides. You can only put tariffs on what you actually import, so the threat that Mexico, the EU, and China can muster up in a trade war is limited compared to that of America. Wei Li, senior economist at Standard Chartered in Shanghai, estimated that a U.S.-China trade war would cost China between 1.3 and 3.2 percent of its GDP. The comparable figures for the U.S., however, were just 0.2 to 0.9 percent.

brump brade beficit

We can see here that President Trump has far less to worry about from a fall in international trade than his counterparts Xi Jinping and Jean-Claude Juncker. And he seems to be aware of this, declaring on twitter that America’s trade deficit meant trade wars had become “easy to win”. But this declared victory is very telling of the way in which Donald Trump perceives the world. International trade is seen as a zero-sum game, one in which one side wins and the other side loses. But while the above estimates of cost to GDP to both stakeholders in a U.S.-China trade war were, indeed, more favourable towards America, it is important to keep in mind that both figures were ultimately negative. That is, while America may come out of it better than China, both countries would be harmed by the trade war, so there should be no incentive for either side to enter it in the first place. ‘Winning’ should never come at the cost of your own nation’s prosperity.

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