Nobody wins a trade war
The Trump administration is abandoning the liberal, rulesbased international economic system the United States helped create over the past 70 years. The administration’s mercantilist, tariff-based trade policy, designed to shrink the trade deficit and recover lost jobs, is dismantling, brick by brick, the world trading edifice.
The economic and geopolitical consequences of a trade war with China and others could be profound.
In March the U.S. announced it would slap tariffs on steel and aluminum imports from several countries to help bolster employment in both sectors, which have been dwindling for decades. However, the policy has the economics wrong on two fronts.
First, falling employment in both industries is largely due to productivity gains rather than trade. In other words, each unit of labor can produce more output than it could previously. These productivity gains improve our standard of living and national well-being and thus ought to be embraced rather than shunned.
Second, industries that consume steel and aluminum, such as automakers, aerospace, construction and food packagers, will be harmed through higher input prices.
Also, the number of employees in these industries dwarf the number of workers in steel and aluminum. Lydia Cox of Harvard and Kadee Russ of the University of California, Davis, estimate that steel-using industries employ 80 times as many people as steel-producing industries.
Another estimate by the consulting firm Trade Partnership shows that these tariffs would create 33,000 short-term metal-making jobs but eliminate 179,000 jobs in metal-consuming industries. On net, the policy would have a deleterious economic impact.
Unfortunately, the economic harm doesn’t stop there. Other nations have already threatened to respond to our tariffs by enacting their own tariffs on our exports.
After the initial March announcement, China said it would place tariffs on several U.S. export items, and then followed up with an expanded list that included soybeans, cars and planes. To retaliate, the U.S. suggested it would place tariffs on roughly 1,300 Chinese products, only to have China respond with proposed tariffs on another 106 categories of U.S. goods.
Granted, none of these tariffs have come into effect so some analysts believe these tit-fortat moves might be an administration negotiating tactic. But a trade war between the world’s two largest economies would damage both countries and the world economy. Recent stock market turbulence, characterized by heightened volatility and falling stock prices, indicates investors fear we are precariously close to a full-blown trade war.
The potential geopolitical effects of abandoning the rules-based international economic order may be as severe as the economic ones. While the World Trade Organization (WTO) and its precursor, the General Agreement on Tariffs and Trade (GATT), are designed to facilitate global trade and prosperity, they are also intended to favor multilateral rules over big-power domination. Nations peaceably adjudicate their trade disputes at international forums, rather than implement wealth-sapping protectionist and beggar-thy-neighbor trade policies or outright armed conflict. The current system promotes international cooperation.
The current liberal economic order has also helped the U.S. solidify its alliances and enhanced its “soft” power. This benefit must not be underestimated or squandered, especially when China’s economic heft and growing military pose legitimate rivals to our global influence. Yet that is precisely what the U.S. is doing. Even our staunchest allies, such as Canada, Mexico and the European Union, have threatened to retaliate if we impose tariffs on their exports. A U.S.-induced trade war will impose global economic costs and threaten our national security. The administration should stand down.