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?

Dünya Executive - - COVER PAGE - By Ugur Civelek

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.

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