Will Trump's trade wars lead to a serious shift in global stability?

Industry News | 25 July 2018

Tariffs are leading to trade wars, but is it a similar situation to that of the 1980s?


It was no secret during Donald Trump's presidential campaign that he would be a confrontational president if elected. However, much of the world has been surprised since that shock election at just how much of a showdown he has initiated with some of the global superpowers, particularly when it comes to trade.

He had talked during his decades as a business mogul about his enthusiasm for protectionism and tariffs, and the first hint that he would apply them with gusto in his new role as US president came back in March in a Twitter comment.

The first actions

"When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win," Mr Trump wrote, shortly before imposing tariffs on steel and aluminum going into the US.

Since then, president Trump has been on a six-month mission to apply tariffs on everything from metal to solar panels and the impact is starting to be felt in the form of a hit to the economy and fears of all-out trade wars.

Tariffs have already been applied to billions of dollars' worth of imports from China - the worst-affected country by Mr Trump's perceived mission so far - and there have been more threats that another $500 billion (€427 billion) could soon be subject to taxes. This is almost equal to the total value of goods that America purchased from China last year.

Mr Trump has called the actions against China the "right thing to do for our country", alleging that "we have been ripped off by China for a long time".

The Chinese foreign ministry has said that if the US "continues to be wilful, countries around the world will only harden their resolve to hit back", Reuters reported. China has already implemented 'tit-for-tat' levies on many US products.

It isn't just China, though; Canada is Mr Trump's second-largest trade war battle front, with 4.5 per cent of its trade now subject to tariffs. Canadian prime minister Justin Trudeau has said the levies are "insulting".

Economic consequences

Meanwhile, as the trade wars escalate, economists are warning of far-reaching potential economic consequences. The International Monetary Fund warned this month that conflict could lower global growth by 0.5 per cent by 2020 - and it is the US that would be particularly vulnerable to its own actions.

Even more ironically, analysts suggest that the hardest-hit regions of the US are likely to be the states where Mr Trump won in the presidential election.

Seemingly recognising this, the president has unveiled a plan to help US farmers being affected by the trade wars by providing $12 billion (€10 billion) in aid and buying unsold crops. They have seen taxes raised on US products including soy beans and cranberries, many of which would have gone to China. With agriculture making almost a quarter of its money from exports, this is a sector that could be badly affected.

There are also major issues cropping up for American businesses that use parts from overseas to make their own products. As prices rise, fears are growing that there may be significant price rises for consumers or widespread job losses.

A 'Reagan moment'?

However, some experts have suggested that there could be more serious consequences than even these in the long term. Mohamed El-Erian, chief economic adviser at Allianz and former chairman of the Global Development Council said in an article for Project Syndicate that he fears a full-blown trade war could prove to be a "Reagan moment" for international trade.

In the 1980s, then-president Ronal Reagan initiated a military spending race with the Soviet Union that ended up with the splitting of the Soviet bloc, the creation of new countries and a major shift in global power.

He pointed out that tariffs "encourage simultaneous economic contraction and inflation" and could "risk undermining global recovery", making them a risky game to play.

Although Mr El-Erian said the US is generally more economically resilient than other countries and so should do better in a contracting world economy, he warned against pushing China too far.

"China holds a massive volume of US Treasury bonds which it could use to try to destabilise the US government bond market, which is essential to the health of the global financial system," he pointed out.

The expert added that it is too soon to see if Mr Trump's actions will prove to be the Reagan moment of the 21st century so far, but said he hopes the world's trade powers will avoid continuing along a mutually destructive path and opt instead for negotiations.

At present, that peaceful path to better international relations might seem some way in the distance.