Trade wars have no winners

War is always hell.

However, a military war is different from a trade war. Beyond the economic consequences and their impact on people’s lifestyles, trade wars have other consequences that last for decades, even after normal trade practices resume.

The economic consequences of a trade war are obvious. The first impact of the trade war started by US President Donald Trump is short-term turmoil in financial markets.

Nervousness has gripped global financial markets as few economic models have factored in how disruption in international trade would affect inflation, economic growth and consumer confidence.

International organisations like the World Trade Organisation, the IMF and the OECD, as well as businesses and market forecasters, have warned that US import taxes could translate into consumer price increases.

The US trade group, the National Association of Wholesale Distributors, warned: “Tariff-induced disruption risks exacerbating inflation, increasing the cost of essential goods and placing financial strain on businesses and consumers alike.”

Protective tariffs risk triggering a cycle of escalation that ends well for no one. The traditional trading partners of the US are retaliating with tariffs of their own, further reducing the international competitiveness of US domestic manufacturers. Cordell Hull, the longest-serving US Secretary of State, once argued that “a prohibitive protective tariff is a gun that recoils on ourselves”.

The more enduring adverse consequences of a trade war are even more worrying. Tariffs will almost certainly strain cultural ties between the US, its North American neighbours, as well as Europe. Worryingly, trade wars can, and do, evolve into military wars.

A good grasp of economic history confirms the risks of trade wars evolving into military wars. Albert Hirschman was a Jewish-German economic historian. As a young man, he had fled Germany, fought in the French Army and helped smuggle refugees out of Nazi-occupied Marseilles.

He argued in one of his books that trade wars “undoubtedly sharpen national antagonisms. They provide excellent opportunities for nationalist leaders to arouse popular resentment. International economic relations provide them with an excellent instrument to achieve their ends”.

In 1930, US President Herbert Hoover ignored the advice of over a thousand US economists and approved the Smoot-Hawley Act that raised import duties to protect American businesses and farmers, adding considerable strain to the international economic climate of the Great Depression.

Beyond the economic consequences, Smoot-Hawley wrought fearsome geopolitical consequences. American products suffered boycotts, American citizens abroad were insulted, and the world’s foreign ministries erupted in protest. It corroded the political and moral intangibles of trade. 

Worryingly, trade wars can, and do, evolve into military wars

Some wonder how, in a democracy, ordinary people can elect political leaders, who cause so much disruption. The simple answer to this query is that today, many national leaders are inept and out of touch with the realities ordinary people face.

David Autor is an American economist, public policy scholar and professor of economics at the Massachusetts Institute of Technology (MIT). A decade ago, he studied how American workers were affected by the competition from cheap Chinese imports. He concluded that American communities most exposed to competition from Chinese imports had suffered higher unemployment, forced retirements and increased healthcare and disability costs.

Some conventional economists would argue that displaced workers will retrain or move to places with more jobs. This did not happen. Those who lost jobs to Chinese competition rarely regained high-paying work; they remained in place and either retired or collected disability payments. Despite economic statistics in the last few years confirming that employment in the US has rebounded, it came from lower-paying service-sector jobs filled by the young and immigrants.

Europe has not managed the phenomenon of globalisation any better than the US. Mismanaged immigration challenges, failed attempts to reintegrate workers displaced by the dynamics of globalisation, failure to invest in real innovation and education that prepares young people for the economic realities of today, and short-term focused mindsets of Europe’s national leaders are behind the slow agony that many countries are suffering.

However long the current trade wars last, the immediate result will be a group of solidly antagonised trade partners, substantial damage to the multilateral infrastructure, an end to unified support to help manage the expansionary ambitions of non-democratic superpowers, and the growth of sterile defensive nationalism that exploits people’s fears and mistrust of traditional politicians.

Who can blame anyone for arguing that an American or a European signature on any trade agreement is not worth the paper it is written on?  It will take decades of diplomacy to overcome the growing mistrust among once-friendly democracies.