This Means War

Trump is reducing risks by suspending tariffs on the EU and others and focusing on China, but a trade war is something that has no winners.

In the 1933 Marx brothers film “Duck Soup,” we repeatedly heard “Of course, you know, this means war.” Groucho repeats it in the 1935 film, “A Night At The Opera.” Bugs Bunny repeats it in the 1938 film, “Porky’s Hare Hunt.” We have therefore entered the stage of entertainment in the commercial relations between the U.S. and the rest of the world. Hopefully this will be more of a cartoon than a drama.

All of this relates to the U.S. president’s decision to raise tariffs on imports from several countries, including China and the European Union, in order to supposedly defend jobs and punish unfair trade practices. China in particular is accused of stealing intellectual property for decades. So, after the announcement last Thursday of 25 percent tariffs on steel and 10 percent tariffs on Chinese aluminum, the president tweeted the next day that “trade wars are good, and easy to win,” and finalized a list of targeted products, representing $60 billion of imports from China.

There are now 30 days for conversations, a deadline to find a solution. The Chinese, on their side, have threatened to retaliate, for now against $3 billion to $6 billion of U.S. imports. The big question is what losses this will bring to the global economy. Immediately, Liu He and Steven Mnuchin lost a weekend trying to avoid a trade war and the Chinese seem available to negotiate.

A trade war is something that has no winners. A very well-known example is the Smoot-Hawley Act of 1930, when the U.S. created the biggest increase in tariffs since 1828. The scale of this conflict raised U.S. tariffs from 13.5 percent to 20 percent, a 50 percent increase in the rate, reaching a total tariff of 60 percent on 3,200 items. The drop in international trade was one-third.

In the U.S. things did not improve: The unemployment rate went from 8 percent to 16 percent in 1931 and 25 percent in 1932-1933. When George W. Bush raised tariffs on steel in 2002, the United States lost 200,000 jobs, 13,000 of them in the steel industry. The Peterson Institute for International Economics estimates that each job in the steel industry “saved” by Bush cost $400,000, not to mention that the WTO concluded that those tariffs were illegal.

Trump is reducing risks by suspending tariffs on the European Union and others and focusing on China. If he achieves substantial gains, he will create leverage to impose conditions on other partners; if he loses, we will have a conflict for a few years. Let us, therefore, follow with natural expectation the “chicken” game we’re seeing and hope that reason wins out in the end. Because, as George Santayana wrote, “Those who cannot remember the past are condemned to repeat it.”