Trump Declares Trade War

On Thursday, President Donald Trump imposed $34 billion in tariffs on Chinese exports. China retaliated against U.S. exports of the same monetary value. So far this year, the U.S. and its business partners have applied $165 billion in taxes to internationally traded goods. We are seeing the greatest use of tariffs by the U.S. since 1930, when the government imposed the protectionist Smoot-Hawley Tariff Act, which worsened the Great Depression, according to expert Douglas Irwin.

This confrontation between the two countries with the largest economies in the world has the potential to go from bad to worse, hurting global growth. Already Trump is promising to impose tariffs on another $16 billion of Chinese exports soon, and we can expect similar reprisals from China, to which Trump has said he will respond with more protectionism affecting $100 billion in Chinese goods. Meanwhile, the Trump administration is preparing tariffs on some $300 billion in imports of cars and car parts. He can expect protectionist retaliation from countries affected.

In a short time, the trade war could affect $1 billion of U.S. trade, or 25 percent. And that, according to expert Dan Ikenson, is without considering the real possibility that U.S. behavior will encourage other countries to increase their tariffs beyond what the U.S. is already doing.

Trump is the first president since the 1930s to have moved away from the U.S.’s explicit commitment to reducing international trade barriers. Instead, he is violating global rules of international trade and is questioning the institutions that have protected world trade.

The fact that Trump really believes that trade wars are easy to win is a reflection of his true faith in protectionism. He is completely wrong. Unfortunately, his ignorance in this regard is already reducing prosperity by decreasing competition and creating an environment of international uncertainty.

For example, the tariffs Trump raised this year on steel and aluminum protect thousands of U.S. workers that produce these metals. But they increase costs to all industries (such as the automotive) that depend on these products. So, these industries and their workers, which number greater than the workers in protected sectors, end up paying the costs. In fact, it is estimated that the tariffs on steel and aluminum will produce a net loss of 400,000 jobs in the U.S.

The tariffs that Trump imposed on China damage the U.S. economy for the same reason. Ninety-five percent of the Chinese goods affected are intermediary inputs and capital goods (machinery). In other words, the manufacturing sector and a range of U.S. companies will be hit hard by Trump’s measures.

Trump’s mistakes will continue because his vision of trade is outdated. At this moment, 80 percent of international trade is conducted by multinational corporations or is done through global supply chains, according to the Peterson Institute. That is to say, producing a product such as an iPhone requires production from numerous countries that contribute something of value. This process enriches the parent company (in this case, Apple) and consumers. The U.S. tariffs hit U.S. companies, workers and consumers hard.

For the same reason, they hit the global economy hard. They reduce prosperity in the most important economies in the world and in the economies (such as the Chinese and Latin American) that produce input. They reduce the prosperity of the whole world. Given that Trump has created uncertainty in the future of trade, the global potential to create wealth will fall further.