Donald Trump is spoiling for a trade war he’ll probably win. But if history teaches us anything, it’ll be a Pyrrhic victory that will hurt the US in the long run.
The US is preparing to slap 25% tariffs on steel imports and 10% levies on aluminium. Trump justifies the move by claiming that disparities in global alloy prices, which make domestic output among the world’s most expensive, are a matter of national security. Earlier this year the “economic nationalist” president imposed a 30% tax on foreign solar panels and washing machines.
No Clear-Cut Winners
Retaliatory measures have already been threatened by China and the European Union, and with Trump tweeting “trade wars are good, and easy to win”, it’s likely more measures will follow.
The sheer size of the US economy means it can dictate terms to all but its largest rivals. But academics and financial observers are hard pushed to identify any historical precedents to suggest Trump’s anticipated victory will be a win for the US economy. From 17th century taxes on French wine imports into Britain to the Opium Wars in China and the 2002 steel tariffs of George W Bush, the annals of trade wars are littered with aggressors reaping more than they sowed.
“There are no historical examples where trade wars led to clear-cut winners without exceptionally heavy losses,” said Michael Plouffe, assistant professor in International Political Economy at University College London.
The most recent comparison is Bush’s imposition of tariffs on more than a dozen imported products to protect the high-priced domestic steel industry. Like Trump, Bush steamrollered the measure past sceptical members of his own Republican party.
Almost immediately, he was forced to allow exclusions to key importing countries and was threatened with a $2 billion fine after the matter was brought before the overseer of global trade, the World Trade Organisation.
Bush said his initiative had created 3,500 new steel jobs. But 18 months after their imposition, the tariffs were withdrawn amid a startling, and unsustainable, fact: Each new steel job had been created at a cost of $400,000 of public money, according to the Peterson Institute for International Economics estimates.
On the markets, the stanching of cheap imports sparked a spike in the cost of products made of steel, which stoked consumer price inflation and suppressed stocks. The higher costs of steel couldn’t even outweigh a slump in the dollar and consequently more than 200,000 jobs were lost as manufacturers shifted operations to countries that could source cheaper alloy, or simply went bust.
“There have been trade wars where nations devastated other nations’ economies, which typically happens when one nation has a significantly larger economy than the other, but there is little evidence that the ‘winning’ nation itself was better off than before,” said Matthew Pinsker, adjunct professor at the Virginia Commonwealth University Wilder School in the US.
Labour Markets Hammered
Scholars point to other historical parallels. When the US imposed taxes on Canadian imports in 1866, Ottawa reciprocated with its own measures that so punished American manufacturers they moved production north of the border, hammering the domestic labour market in the process.
A more apposite example, argues Plouffe, is the Smoot-Hawley Tariff, passed in 1930. Conceived to prop up prices of agricultural products that still languished after the First World War, the measure was met with similar actions by other countries, particularly Canada. They rebounded on a US economy still reeling from the Great Depression.
“The effects of the Smoot-Hawley Tariff and the other protectionist responses were to delay a return to economic growth,” Plouffe said. “Some estimates put Smoot-Hawley’s effect at a couple of years of delayed recovery.”
A ‘Positive’ for US
Proponents of Trump’s tariffs contend they will not only be positive for the US economy, but will also spur investment in “clean”, environmentally sound, alloy production.
“While the US may see a slight increase in the price of new automobiles for the first year, while the new plants are firing up, over the long run we will likely see prices start to adjust downward as the economy thrives and competition within the American market stabilises prices while increasing production,” said international mediation expert Christopher Smithmyer.
That may be a view even Trump is reluctant to subscribe to. He’s already watered down the proposals before implementing them, promising exclusions Canada and Mexico, and promising to consider similar treatment for countries that formally request it. If, however, he presses on as expected, veteran financial services commentator Bill Stack is in no doubt that history will repeat itself.
“The American steel producers would benefit, by making more steel for higher prices, but every industry that uses steel, and every consumer that purchases something made with steel, will pay the price,” he said.