When President Trump defied his own party and ordered to impose around $60bn of tariffs on Chinese goods last month, fears of a trade war were immediately raised.
China responded and said it was “not afraid of a trade war”, but remains hopeful of avoiding one through continued dialogue. It retaliated with its own set of tariffs worth $3bn.
Markets reacted strongly, prompting fears of a financial crash.
The imposition of tariffs is a common element of a trade war: where two or more states attempt to damage each other’s trade by imposing restrictions. They are commonly started when one country perceives another’s trading practices to be unfair, or when domestic unions pressure politicians to make imported goods less attractive.
“The actions we are taking today are not a matter of choice,” said Trump after he officially authorised the tariffs. “They are a matter of necessity for our security.”
Worries of a trade war with China were raised by the language of protectionism. Trump announced the tariffs as a way of protecting US aluminium and steel industries from foreign competition, mainly Chinese.
“Trade wars aren’t so bad,” said Trump after the announcement.
The last major trade war
The Smoot-Hawley Tariff Act of 1930, the most infamous of the 20th century, is believed by historians to have played a significant part in the Great Depression.
Sponsored by Senator Reed Smoot and Representative Willis C Hawley, the act raised US tariffs on over 20,000 imported goods, bringing tariff levels to their highest level since 100 years earlier.
Foreign governments quickly moved to increase rates against American products. Canada - the most loyal trading partner of the US - retaliated by raising tariffs on 30 per cent of US exports, moving to forge closer economic integration with the British Empire.
At first a success, the weakness of banks became apparent and problems began to highlight global problems with the act.
Britain and France developed new trading partners and Germany implemented autarky - a self-sufficient economic system that operates without external trade or assistance.
US imports decreased 66 per cent and exports tumbled 61 per cent. It is estimated that world trade decreased by 66 per cent overall as a result of the act.
When the act was passed in 1930, US unemployment stood at 8 per cent. It leapt to 16 per cent the year after and then to 25 per cent in 1932.
It is widely agreed among historians and economists that the tariffs exacerbated and prolonged the effects of the great depression. Although the stock market collapse was a year before the act, it directly led to a significant drop in exports. for example, aspects of the act was aimed at agricultural products including wheat, tobacco and cotton.
This forced many American farmers to default on loans, having a particularly harsh effect on smaller local banks. Debate on whether it caused the depression continues, but that it made it worse is a consensus view.
Will this trade war be as bad as Smoot-Hawley?
When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!
— Donald J. Trump (@realDonaldTrump) March 2, 2018
The World Trade Organisation (WTO) has warned that the global growth could fall “very quickly” as a result of the tariffs between China and the US
The WTO regulates international trade of goods, services and intellectual property between its 123 nations. It provides a framework for trade agreements and dispute resolution between countries, ensuring that they adhere to its set of agreements.
Trump’s tariff announcement and China’s retaliation effectively bypassed the WTO.
The WTO has been called a “catastrophe” and “disaster” by Trump in the past, despite the US’s key role in its creation in 1995.
“[It] has been a disaster for us,” said Trump of the WTO after announcing the tariffs last month. “It’s been very unfair to us.”
This bypassing of the WTO - an organisation founded on the preservation of global free trade - echoes the actions of the US in 1930 when it decided to turn its economy inward by restricting the flows of international trade.
Retaliatory tariffs from China - which could spread to Europe- would raise the costs of imports from the US and make it a lot harder to export. This would have the knock-on effect of price rises that could hurt the consumer.
Fewer exports also make firms less globally competitive, which can lead to less hires and even job layoffs.
The future of the tariffs is unclear: The EU for instance was granted a temporary exemption US steel tariffs until May the 1st, but Trump has also threatened an additional $100bn of Tariffs against China that would certainly bring about a full-fledged trade war.
Its main argument is that tariffs on imports will lead to a rise in consumer prices, causing retaliation and leading to geopolitical tensions.
It warns that “A tariff war does not furnish good soil for the growth of world peace.”
Much need to happen have a similar impact to the Smoot-Hawley Act, but its central claim-that protectionism is bad for the economy- rings as true a warning today as it did in 1930.