No Survivors in Trade Wars

While tariffs are generally ineffective in increasing aggregate employment, trade wars are downright harmful.

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Illustration: Rebecca Feng

A trade war might be emerging between the U.S. and China, which threatens to have a monumental impact, not only severely hurting trade profits on both sides, but also destabilising existing foreign policies. While the Trump administration has since tried to quell fears of retaliatory tariffs planned by China to threaten American jobs, the effort was half-hearted. This week has seen a series of “tit-for-tat tariffs”.

The conflict was first instigated by President Trump’s shocking announcement on Friday 23 March, imposing blanket tariffs of 25 per cent on foreign steel and 10 per cent on foreign aluminium. These tariffs were set without Congressional approval according to the Trade Act of 1974, section 301. This legal provision has fallen out of popular use since the founding of the World Trade Organization in 1995: an organisation whose effectiveness was largely criticised by President Trump.

The tariffs designed to aid domestic businesses and consumers may backfire on America’s own economy. President Trump’s initial blanket tariffs targeting foreign steel and aluminium were part of a focused effort to suppress China’s hold as the world’s largest steel producer (controlling 49 per cent of the global market) and hopefully increase job production. Despite the fact that the United States is the world’s largest steel importer, China would feel minimal effects from these sanctions, since it accounts for only 2 per cent of American steel. Instead, it would directly harm America’s neighbouring trade partners such as Canada, which is responsible for 17 per cent of American steel imports. Additionally, the tariffs may stifle American jobs in the construction industry, which relies upon raw materials such as steel and aluminium. Additionally, the tariffs will inevitably increase production costs, which hurts consumers and businesses.

Illustration: Lindsey Wiercioch

Meanwhile, China is fighting back. Beginning on Monday 2 April, China implemented retaliatory taxes on U.S. imported goods worth approximately $3 billion dollars. The following day, the Trump administration responded by further levelling a 25 per cent tariff on 1,300 Chinese products, worth $50 billion dollars. As a direct response, the Chinese government also set a 25 per cent tax on 106 U.S. exports. Specifically, China’s tariffs will threaten major US exports such as planes, cars and chemicals, as well as agricultural goods.

Furthermore, China’s tariff on soybeans will have a significant impact on American farmers, as China is responsible for 64 per cent of global imports of soybeans. Moreover, soybeans account for 2.6 per cent of China’s imported goods, valued at $34 billion. Chinese tariffs placed on certain agricultural goods would have an immediate impact on American farmers, who rely heavily on foreign sales and would suffer from an isolationist trade policy.

With the possible trade war on the horizon, the risk of nuclear war also looms. If the United States enters into a trade war with China, as President Trump has threatened to do because, “trade wars are good, and easy to win,” it might have adverse effects on diplomatic relations with regards to North Korea. The United States has been pressuring the Chinese government to restrict the flow of resources traded with the hostile government in order to force North Korea to the diplomatic negotiating table. However, a potential trade war hampers diplomatic relations with China, which acts as a primary negotiating chess piece.

The prospect of a trade war has also caused great anxiety among investors, economists and financial analysts. The Dow Jones Industrial Average is down 11 percent from its high in January of 26,616; sharp drops in stock prices since then have come immediately after announcements (or rumors of announcements) of new tariffs. This anxiety exists because historically, trade wars (and the tariffs preluding them) have not resulted in any meaningful benefits, and in fact have caused great economic damage. A good case study of the ineffectiveness of tariffs is when President Bush placed tariffs on steel in 2002. While the tariffs saved some steel manufacturing jobs, they have also been estimated to have cost the United States about 100,000 jobs, mostly in downstream manufacturing sectors such as the automotive and aeronautics industries.

While tariffs are generally ineffective in increasing aggregate employment, trade wars are downright harmful. In the opening stages of the Great Depression, a panicked Congress sought to protect American manufacturers and farmers from international competition. The 1930 Hawley-Smoot Tariff Act introduced tariffs on more than 20,000 foreign goods. This had two consequences; neither of them were good. The first consequence was that American consumers, already suffering unemployment or pay cuts, now had to pay more for anything they bought from outside the United States. This resulted in a further decrease in consumer confidence and consumption. The second consequence was that American trade partners in Germany, Canada and the United Kingdom introduced retaliatory tariffs, which hurt American manufacturing and severely reduced international trade. Both consequences contributed to the longevity and severity of the Great Depression.

With these historical precedents in mind, investors have responded negatively over the past month to any tariff proposals from the United States or China, leading to enormous instability in global stock markets as the possibility of a trade war waxes or wanes on the back of one man’s Twitter account. And while the current proposals would most likely cause some economic damage, the greater fear of economists and investors is that this is only the beginning of a protracted and wide-ranging trade war that, if escalated far enough, could see the near severing of economic ties between the world’s two largest economies. Such a situation would most likely cause a severe economic recession in both the United States and China and would consequently set off negative economic ripples across the world.

It is important to keep in mind that these tariffs are still nothing more than proposals. The U.S. tariffs will not go into effect for seven weeks, a period in which negotiations with the Chinese government will play out. The Chinese tariffs do not even have a “due date” per se; they will only go into effect when the American ones do. The recent downturn in global stock markets could prove ephemeral if the United States and Chinese governments are able to come to an agreement before the tariffs go into effect. However, President Trump has made it clear that he will not tolerate (cited as it was written on Trump’s Twitter) “a Trade Deficit of $500 Billion a year, with Intellectual Property Theft of another $300 Billion. We cannot let this continue!”

A tough stance on trade has been one of the Trump administration’s most consistent policies, and the President himself appears to take a great interest in “beating” China economically. It therefore seems likely that the tariffs will come into force, though it is possible that powerful lobbying groups could secure an exemption for their industries much as Canada and Mexico were able to secure exemptions from the earlier steel and aluminum tariffs.

While the current violent swings of the stock market are not yet affecting the average worker, we should stay attentive. This volatility is a signal that there may be an economic storm on the horizon, one that could affect us here in the United Kingdom. It is an especially poor omen for students, whose career prospects are so reliant on the job market at the time of graduation. St Andrews is far removed from Washington and Beijing, but just as in 2008, an economic crisis starting a world away could quickly lead to financial pain here at home.

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