The looming global trade war


President Donald Trump has long been keen to defend United States workers from the “carnage” of “bad trade deals.” To that end, he has now decided to impose tariffs and quotas on imports of steel and aluminum. He also threatened the European Union with trade barriers on automobiles and could take even more measures on intellectual property rights and technology goods. It is more plausible than not that this is the beginning of a costly tit-for-tat whereby United States trade protection will be countered by others.
The bad news is that a fully-fledged trade war would create serious economic damage. Recent estimations by Ralph Ossa from the University of Chicago indicate that a global trade war, resulting in a rise in trade barriers for all countries, would slash real incomes by an average 3.4%.  At the global level, this would correspond to a loss of almost one full year of growth efforts.
President Trump’s move is surprising in that it will negatively impact the United States economy, although the extent of harm would be limited to the loss of jobs in the user industries of the protected sector. According to Ralph Ossa, this can be illustrated with the case of the United States steel safeguard tariffs between March 2002 and December 2003. Back in 2002, mounting competitive pressures on the steel industry led President George W. Bush to impose safeguard tariffs ranging between 8% and 30% on ten steel product groups, with a total of 272 tariff lines.
Steel imports from North American Free Trade Area (NAFTA) countries, from other preferential trade agreement parties (Jordan and Israel) and from 100 developing countries were exempted. Moreover, around 1,000 firm-specific exemptions were granted by the United States. As a result of trade restriction, United States imports of steel products declined by 5% between 2002 and 2003, bringing the steel industry sector’s trade deficit down by 28%.
The protection of the steel industry produced negative spillover effects to other parts of the United States economy. Steel is a key input in several industries, among others manufacture of basic metals, manufacture of fabricated metal products, manufacture of electrical equipment and manufacture of machinery and equipment not elsewhere classified. Taken together, the steel-using industries generated in 2001 far more value added than did the steel industry itself and employed 57 workers for every employee in the steel industry.
Should President Donald Trump push ahead with protectionist pledges, a tit-for-tat trade conflict or at least elements thereof would be unavoidable. Smaller muscle flexing with respect to single industries would probably not harm the overall economic picture. However, a fully-fledged trade war would be detrimental to both the United States and its trading partners.
More generally, the current Trump administration’s strategy reflects a false diagnosis of the underlying problem of chronic current account deficits registered by the United States. As long as United States excess consumption is financed by savings from abroad, there is no economic reason for current account deficits to improve. Protectionism only reallocates the deficits among sectors.
Professor John Burton of Leeds University argued that with regard to protectionism and trade wars, President Donald Trump should heed the warning of his illustrious predecessor President Thomas Jefferson that “the most successful war seldom pays for its losses.” Following up on his 2016 campaign threats, United States President Donald Trump has now stoked the worst trade tensions in decades. Understandably, markets are nervous.
According to Professor John Burton, when it comes to trade, the European Union is a top global power that is able to act. External trade policies for the European Union are largely a prerogative of the European Union authorities in Brussels. Of the three major global players, the United States, the European Union and China, the European Union is the one with the least pronounced political agenda and hence the highest probability of acting roughly in line with economic logic.
Where it gets really interesting is to look at the European Union inside this triad from a the United States perspective. One insight is inescapable. The more the United States abstains from imposing new barriers to imports from the European Union, the more may the European Union support United States efforts to change Chinese practices regarding both intellectual property and market access.
At the same time, the United States government correctly points out that European Union import tariffs are, on average, slightly higher than those of the United States, according to most calculations. However, the European Union for its part can argue that it was President Donald Trump who stopped the Transatlantic Free Trade Negotiations. Under this negotiation, the European Union and the United States would have abolished almost all tariffs and many other trade impediments between each other.
The European Union may well be ready to negotiate a mini free trade with the United States. That would allow President Trump to claim that he secured better United States access to the European Union market, while the European Union would benefit from some other United States trade concessions.
Professor William Welsh of Michigan University stated that the European Union is most likely to act roughly in line with economic logic does not mean that the European Union would be a pushover for President Trump in a serious trade dispute. In the most trade-dependent countries of core Europe such as Germany, the Netherlands and Belgium, labour markets are in robust shape. German GDP growth, for example, is constrained by a scarcity of suitable labour, not by a lack of export orders. As a result, the European Union would be ready to take on the United States government, if provoked, and even if that would incur some economic costs.