America first?

The U.S. move to protect its steel and aluminum industries with tariffs has sent shockwaves through the global economy. What are the possible fallouts?

With trade wars looming, we look at what U.S. protectionism means and its consequences

1

Is the probability of a trade war increasing?

The US administration’s announcement that it will apply tariffs on steel and aluminum imports and threats of a retailation from various countries has significantly increased uncertainty about the future. Trade battles and protectionism climbed to the top of the global news agenda. Many countries will be affected, and some have begun to prepare for the looming war.

2

What triggered this standoff ? 3

Have there been similar moves in the post-1980 period?

In a word: globalization, though it is never entirely so simple. Global economic conditions in an environment of rapid change lie at the heart of this. So far, however, no one has been able to figure out exactly what the effects of change in global conditions have had on these developments! Similar interventions have been attempted in the past, in part due to out of control external deficits and issues of competitiveness. In 1995, for instance, some goods imported from Japan were subjected to customs duties and a trade war was launched. In March 1999, there were also U.S. threats of a trade war against the EU, though the aim was quite different from today. Its goal was partly to prevent the EU from establishing its own independent targets and thus free itself from the U.S.

4

How is the situation different this time?

The current situation can be summarized as the “America First” policy of the Trump administration in the backdrop of the failed Washington Consensus on globalization. The U.S. made some serious economic sacrifices to achieve its goals of making the twenty-first century the American century and becoming the sole superpower. Its debt burden exceeded $20 trillion and its annual foreign deficit never fell below $600 billion. Now if it succeeds in its political goals, it will be able to shape the New World Order alone and blame others for the accumulated problems, as the current administration does.

5

How did the international economic order play a role?

On a global scale, opponents of globalization have emerged stronger than ever in politics. Their vision is protectionism, and that vision is spreading. Unsustainable trends and unconventional policy choices have corrupted the existing order and left the problems it produced unresolved. Dependency on financial ballooning, excessive deterioration in the distribution of income and wealth, a negative competitive environment and a general distrust were the result of trends created by globalization, and they have pushed protectionism onto the scene.

6

How does the developed world approach the issue?

After the global crisis, some important issues were on the agenda at the G20 Summit in London. Leaders voiced their opposition to protectionism. The problem was global and the solution had to be global and based on consensus. Effective regulations needed to be restored and negative perceptions of globalization needed to be addressed. The possibility of protectionism in the form of currency wars or trade wars is increasing over time, as consensus-based and global solutions are becoming less feasible. The fact that the U.S. was the first to pull the trigger was perhaps inevitable.

7

What are some of the possible outcomes of a trade war?

Global trade volume shrinks, inflation and unemployment begin to increase, economic recession may occur which may mean crises. The risk aversion trend becomes dominant, downward rigid fluctuations in investment and consumption tendencies gradually increase fragility. The value of assets go down, non-performing loan volumes hit new records and balance sheets erode. Financial structures find it very difficult to continue their activities. Relative prices differ in favor of mandatory necessities. Nationalization on essential needs may become inevitable. Multidirectional instabilities can occur and this may carry geopolitical disagreements to different dimensions.

8

How can the U.S. tariffs threat be interpreted?

The U.S. may be trying to keep the guardianship of economies under its control and may be after compromises that will increase U.S. influence. For this reason, it may be useful to analyze these developments as an impact-response dynamic, by observing them as game theory. At this stage, the responses from China and the EU are of critical importance.

9

What could be the reaction of other countries?

The prediction is that the US will push the limits to get more concessions if the EU does not react, so retaliation seems inevitable. Otherwise they may have to further support U.S. demands on defense spending and new sanctions on geopolitical issues. China, on the one hand, says it will adjust its reaction to developments, while on the other it seems to have convinced North Korea on a conditional basis to stop nuclear work. Obviously they will show a controlled resistance in order not to be in line with the US.

10

What will happen next?

The U.S. will use the exemption of Mexico and Canada in their negotiations to revamp NAFTA and if they receive concessions, market it as a success, thus avoiding new moves against the EU and China. Or they will trigger more instability by making a trade war possible with more, and potentially stronger, moves.