History holds little hope of a winnable trade war

“When you’re already $500bn DOWN, you can’t lose.” Donald Trump’s tweet earlier this week was a neat summary of the US president’s approach to trade: it combined economic illiteracy with the fallacy of an addicted gambler. Having set out plans to apply tit-for-tat tariffs to a collective $100bn worth of imports, the US and China now seem to be playing double or quits, with Mr Trump ordering officials to identify products on which to impose a further $100bn of tariffs, and Beijing declaring its intention to fight back.

If the two countries act on their threats, however, history suggests that both sides will lose — with unpredictable consequences that could go well beyond the economic fallout.

The most notorious example of self-defeating protectionism is the Smoot-Hawley Tariff Act of 1930, which raised US tariffs on more than 20,000 goods. After Canada and other trading partners retaliated, US exports fell by more than 60 per cent. Economists dispute the extent of the damage, but there is little doubt that the measures deepened the Great Depression and had lasting effects on diplomacy as well as trade — prompting countries that had shunned the Soviet Union to forge ties.

A closer analogy to the current skirmishing between Washington and Beijing could be the so-called chicken war of the early 1960s. This began when European countries — alarmed at competition from new methods of factory farming — imposed tariffs on imports of US chicken. The US retaliated with tariffs targeting potato farmers, VW camper vans and French cognac.

Decades later, the “chicken tax” on light trucks is still in place, now paid mainly by Asian manufacturers — and it has caused lasting distortions. Foreign manufacturers eventually found ways to avoid the tariff, by moving production to Nafta countries or the US itself. US automakers were led to specialise in gas-guzzling pick-up trucks, where they were protected — possibly to their own detriment, as they were less prepared to compete in growth markets for smaller, fuel-efficient cars.

Mr Trump himself prefers comparison with the measures Ronald Reagan took against Japan in the 1980s, which ranged from quotas on car imports to punitive tariffs on electronic goods. But these were of dubious benefit: US consumers paid heavily and the US auto industry shed jobs as producers opted to boost prices by limiting output.

Robert Lighthizer, US trade representative, may find the tactics he used in the Reagan administration no longer work even in a superficial sense. Using America’s economic muscle to demand “voluntary restraint” from trading partners may be possible with South Korea — although hardly advisable, given the geopolitical backdrop. It will not be possible with China. Nor would it help: supply chains are global and US manufacturers need to import parts.

Given all this, one might wonder why this week’s escalation in rhetoric has not hit markets even harder. Investors’ relative calm seems based on two calculations.

First, that there is still time to negotiate and back down — and that China will be disposed to make concessions, since it has more to lose. Second, that even if the planned tariffs do take effect, they are not so severe as to derail an otherwise thriving global economy.

The first assumption — which Mr Trump’s economic team is keen to foster — could prove a serious miscalculation. China may have more to lose in economic terms but Mr Trump stands to lose more politically — and so far, Beijing is proving adept at exploiting that, targeting its tariffs on the president’s supporters. There is more truth in the second argument. Unless, that is, the players double their stakes again.