How big a threat to the world economy are the trade conflicts between the US and its principal trading partners, not only China, but also traditional allies? The answer is it depends on how bad the protectionism becomes and how dire the results would be. But it makes sense to worry: the risks are quite big.
How big a threat to the world economy are the trade conflicts between the US and its principal trading partners, not only China, but also traditional allies? The answer is it depends on how bad the protectionism becomes and how dire the results would be. But it makes sense to worry: the risks are quite big.
So far, however, actions have been small. If other announced measures go ahead, affected imports, mainly from China, would amount to $206bn or some 9 per cent of US imports of goods. Threatened tariffs on $275bn of car imports and on another $400bn of Chinese merchandise would bring the total to close to a third of all US imports of goods. According to JPMorgan, the average US tariff would then be 6.5 per cent, up from 1.5 per cent, before the trade offensive began, if all imports from China were dragged into the net. Mr Trump on Friday said he was “ready” to do just that.
After seven decades of trade liberalisation, this would mark a huge turnround. Yet, even after building in retaliation, this would, according to JPMorgan, only lower global growth by about 0.25 percentage points. So is the worry about a trade war a “tale told by an idiot, full of sound and fury, signifying nothing”? This would be far too complacent a view.
The first danger is that protection will spread far further. One reason for this is that Donald Trump is a convinced protectionist. He made this clear at his inaugural, remarking that: “Protection will lead to great prosperity and strength.” His aims are to repatriate supply chains and eliminate US overall trade deficits. Since the latter cannot be achieved by normal trade policy actions, while foreigners are unlikely to bow to his demands, particularly since it is hard to work out what they are, there may be no “off switch”. The Republican establishment does not seem to have one.
The second danger is that protection will spread. When the US imposed tariffs on imports of steel and aluminium, it damaged the downstream users. So they, too, will demand protection. Similarly, when the US keeps out imports from China, the latter will be diverted to other high-income countries. The latter may well follow the US suit.
Third, an open-ended trade dispute would have geopolitical consequences. “When goods don’t cross borders, soldiers will” is a well-known saying. It is not so simple. But if the US waged a war against imports, it is bound to appear a deeply hostile act, with damaging implications for the fragile international order. Making this more likely is the certainty that the actions the US is taking (and the retaliation it is evoking) are all contrary to the World Trade Organization’s rules.
Finally, such an open-ended trade war would surely greatly increase business uncertainty. That would then affect investment across the world, especially in the world’s more open and trade-dependent economies. As Mark Carney, governor of the Bank of England, has noted recently, trade helped to stimulate the upsurge in global growth since 2016. A fall in world trade would surely have the obverse effect. JPMorgan stresses that its “model-based estimates cannot . . . capture the potential for a larger drag as business sentiment decline. Concerns relate to the growing risk that rising tariffs signal a more fundamental shift in US policy.”
Just so. If action were halted now, the world economy would survive reasonably unscathed. If we are at the beginning of an ongoing process of tit-for-tat protection and regime destruction, the effects could not so easily be guessed. The sensible thing to do is not to go there. But will the world be so sensible?
