Contrary to claims by President Trump, trade wars are not easy to win. In fact, they’re nearly impossible to win. Trade wars damage economies, threaten stability and, most notably, hurt workers.
Tariffs almost always elicit a response. The international system is too connected for unilateral action, so tariffs don’t happen in a vacuum. It’s pretty much a three-step system: 1) We impose tariffs on foreign nations. 2) Other nations impose tariffs on our goods. 3) Voila, a trade war.
There are lots of examples of this in history, most famously the aftermath of the Smoot-Hawley Tariff Act. The Smoot-Hawley Act was signed in 1930 to protect the American agricultural industry by making European agricultural products more expensive — thereby helping the US recover from the Great Depression.
Sounds cool, but it had the opposite effect.
The Smoot-Hawley tariffs led other nations to place their own tariffs on US goods, further hindering the US’ recovery and contributing to less global trade and, ultimately, an overall decline in the global economy. We see hints of this when the European Union threatens retaliatory tariffs on American goods like Harley Davidson, bourbon, and blue jeans.
But, that’s not all. In addition to the damage from other nations’ tariffs, our own tariffs hurt domestic industries in other ways. For example, tariffs on foreign steel may ostensibly help our steel industry, but our auto industry will suffer because it can no longer buy cheap steel. And, when the auto industry suffers, auto workers suffer – again.
As a third-order effect, goods that use aluminum and steel (everything from TVs to automobiles to apartment buildings) will cost more to produce, and thus more to purchase. American consumers will end up paying for the tariffs.
Interdependence makes international relations more complicated for sure, but it also arguably makes the international system more stable and less vulnerable to war. In fact, no two great powers have gone to war since World War II. There are a variety of theories to explain why we’ve enjoyed this “Great Peace,” one of which is economically-based and championed by political thinkers Joseph Nye and Robert Koehane. Complex interdependence theory argues that when countries are intertwined economically, culturally, or politically they are less likely to go to war. Frankly, it’s just too messy. A trade war severs these economic ties – making it easier to shift from a trade war, to a real war.
Although this complex interdependence theory wasn’t codified until the 70s, the concept that increased economic partnerships breed peace was the idea behind post-WWII trade agreements, specifically the Global Agreement on Tariffs and Trade which was updated in 1994 and serves as the successor to the current World Trade Organization. Post-WWII nations wanted to avoid the mistakes of Smoot-Hawley and create a more stable and interconnected economic system.
The theory of peace from trade holds true even when one side benefits more from an economic partnership. The China-US trade relationship is one such example of what scholars call asymmetric interdependence. President Trump often cites how China is coming out on top in trade agreements. Most economists would agree. However, precisely because China benefits more from this relationship, they are less likely to leave it – or do something that causes the US to leave it. They have more to lose. The US, in short, has an economic bargaining chip because it can explicitly or implicitly threaten to pull out of trade agreements. China may have more tangible benefits from such an agreement, but the US gains more power.
This asymmetric interdependence also keeps US interest rates down. Precisely because of the trade gap, China has the money and incentive to buy US debt and does so more than any other country. As the US closes that trade gap through tariffs, China will have less of a reason to buy US debt, raising the interest rates on our debt.
Economic agreements are powerful tools in international relations, and there are some examples of tariffs having been helpful in growing infant economies, but when tariffs result in a trade war – no one wins. A trade war will hurt the American economy and its workers, it will hurt the global economy, and it will threaten partnerships and global stability, which can result in violent conflict.
The US can win a lot of wars. This isn’t one.