It’s easy to start a trade war. It’s harder to stop one. And it’s almost impossible to win one.
On Wednesday, President Donald Trump unleashed such a war on the world. He imposed a 10% tariff, or tax, on all foreign goods coming into the United States. He fired bigger volleys at about 60 nations or trading blocs, imposing tariffs as high as 50%. Asian nations came under especially heavy attack: 46% for Vietnam, and 54% for China, including earlier tariffs. The European Union got hit with a 20% duty.
Global stock markets tumbled, with America’s S&P 500 down nearly 5% Thursday, and down 12% from its Feb. 19 peak of 6,144.
Why We Wrote This
President Donald Trump appears convinced that tariffs can help – not hurt – a nation’s growth. The success of his global trade shake-up may hinge on whether he uses tariffs as a tool to break down trade barriers or as a permanent shield for U.S. factories.
The next phase is a more dangerous one: the nations’ response, especially large trading partners like China and the European Union.
Why is this phase more dangerous?
Some past trade wars have escalated with rounds of tit-for-tat tariffs. That’s what happened in the 1930s. It could happen again.
What are foreign nations’ options?
They could eliminate their tariffs and other policies that crimp demand for U.S. goods, as President Donald Trump has urged them to. They could negotiate, but they have little time. America’s universal 10% tariffs go into place Saturday, with bigger targeted ones going into effect April 9. They could do nothing and simply let their economies adjust as best as they can. Or they could retaliate with their own tariffs on U.S. goods crossing their borders. China, Japan, and the EU have all threatened tariffs.
Why is Trump starting this war?
He claims the rest of the world is taking advantage of the United States by imposing unfair barriers to American goods. He has a point. After World War II, Washington was eager to rebuild democracies and gave various nations generous trade deals to speed the process. Those barriers have come down dramatically over the ensuing decades as nations negotiated trade-barrier reductions through various rounds of trade talks.
But a pattern of chronic and huge trade imbalances has developed, with the U.S. consistently importing much more than it exports, and with the U.S. share of global manufacturing declining. Pushing back against these trends, Presidents Trump and Joe Biden began to raise U.S. tariffs in 2017 and beyond.
Still, before this year, a foreign product coming into the U.S. got tagged with a typical tariff of just 2.2%, less than in major trading partners such as the European Union (2.7%) or China (3%), according to the World Trade Organization. Now, a foreign company shipping goods to the U.S. will pay a weighted average tariff of 18.8%, according to a Goldman Sachs analysis, or higher by some other estimates. That would outstrip even outlier India (12%).
Rather than negotiate over trade relations, as postwar presidents have done in the past, Mr. Trump is going on the offensive to force change.
That sounds reasonable. Why wouldn’t nations agree to that?
Many nations view exports as a key part of their economic strategies. And it’s tricky because trade barriers come in different forms. Tariffs are relatively straightforward. Nontariff trade barriers are not.
Take Vietnam. It imposes less than a 15% tariff on foreign imports, including U.S. goods. But in a report released earlier this week, the Trump administration pointed to other barriers that Vietnam has imposed on American products, such as increased taxes on imported alcohol and bans on imports of certain toys, used auto parts, and encryption software. Those aren’t tariffs, but they certainly discourage foreign goods from coming into Vietnam.
Or consider China, which has rejected imports from certain U.S. pork processing plants because of detections of animal diseases. Those diseases regularly occur in China and pose no threat to humans, according to the report. Is that a reasonable health precaution – or a trade barrier? Such nontariff trade barriers often lie in the eye of the beholder.
In calculating the level of tariffs to impose, the administration says it is factoring in these nontariff barriers. Rather than identifying ground-level estimates of the barriers, the administration developed a formula based on existing bilateral trade deficits with each nation. The White House claims that Vietnam’s trade barriers amount to a 90% tariff on U.S. goods, rather than nominal tariff levels below 15%. Therefore, it is imposing a reciprocal tariff of about half that level, or 46%. Some U.S. experts are questioning the calculations. Certainly, the nations themselves will dispute them in negotiations with the U.S. That’s why trade wars can be so hard to stop.
Why are trade wars almost impossible to win?
Because they make economies less competitive. Suppose you have the choice to buy either a $20,000 Chinese electric vehicle or a $35,000 American EV. Which will help America the most? Most economists would pick the Chinese EV. Why? Because the more money Americans save, the more money they have to spend on U.S. goods that are more competitive. And that spending boost outweighs the bounce from protecting domestic factories and jobs, economists say.
Now, factor in retaliation. Other nations, angered by the new American tariffs, will impose their own retaliatory tariffs on U.S. goods, reducing the sales of America’s most internationally competitive companies.
Thus, trade wars shelter a nation’s less competitive firms while hurting the sales of its more competitive ones. Inevitably, growth slows. And prices rise because consumers end up having to buy more expensive products like the American EV. That means at least a temporary boost to inflation.
In the real world, of course, things aren’t so simple. There are geopolitical and even national security reasons for why the U.S. restricts high-tech exports to China and might want to slow imports of Chinese EVs. And those cars may be cheap because of government subsidies, an unfair trade practice.
The current escalation in U.S. tariffs, though, suggests that President Trump, perhaps influenced by unorthodox economists, is convinced that tariffs can boost a nation’s growth rather than slow it in the long run.
What’s the endgame?
That depends on the president. If he uses tariffs as a bargaining tool to tear down trade barriers, then economic growth can accelerate, and 200 years of economic theory will be vindicated. If he makes the tariffs permanent, then America will have embarked on a big and long-term experiment to prove that a fringe trade theory may be right after all.
