The establishment in 1948 of GATT (the General Agreement on Tariffs and Trade) was intended by its founding members, led by the US, to remove the phrase “trade war” from the vocabulary of national leaders and economic policymakers and to replace it with “trade agreements” and “negotiated settlements.” WTO (World Trade Organization), which succeeded GATT four decades later, embodied the principles and procedures that had guided the latter’s operations.
Today, seven decades later, the phrase ‘trade wars’ has been brought back into existence. Ironically, the promoter of the resurrection of the trade-war approach to international trade has been the US, which was one of the most ardent advocates of an orderly world trade order. The world’s presidential palaces and economic ministries are heavily preoccupied nowadays with the barrage of tariff increases that US president Donald Trump has launched against their countries, and hardly a day passes when the international media don’t carry stories suggesting the arrival of a new era of tariff wars.
During the 2016 electoral campaign, candidate Trump did exhibit an obsession with what he termed the US’s existing and prospective trade arrangements—especially NAFTA (North American Free Trade Association) and TPP (Trans-Pacific Partnership—which he considered unfair to the US). Thus, the ongoing renegotiation of NAFTA and the termination of the TPP negotiations came as no surprise to any well-informed observer. What came as a surprise was the campaign to raise tariffs on a slew of goods exported to the US, by such longtime US trade partners as Canada, Mexico, Japan, South Korea and the 28 members of the European Union. In a few instances the announcements of the tariff hikes have been accompanied by virtually personal insults against the concerned government heads.
It takes two to make a war, and predictably the authorities of the exporting countries targeted by Trump looked at the R work: retaliation. No sooner had a bravado-oozing Trump announced the 25 percent tariff increase on US steel and aluminum imports and the $60 billion worth of US imports from China than the affected countries unveiled schedules of tariff increases on an array of goods exported to them by the US. Trade wars are tit-for-tat affairs, and in no time at all the US and its erstwhile trade partners were poised to hurl tariff increases at one another. China, for one, has announced tariff increases on US exports with a combined value of approximately $50 billion.
Will the values and volumes of goods coming into and out of the US decline because of the exchange of tariff increases, and will world trade suffer as a result. The answer to both questions is an emphatic Yes. Except in cases involving price-inelastic demand for imports from and exports to countries, trade volumes and grades are bound to suffer reduction.
It is very obvious that Trump’s trade wars are meant to redeem the America First, no-more-unfairness-to-America promises he made to America’s voters during the electoral campaign. The 45th US President was elected by Americans who fell for his campaign line that the world has been unfair to the US. In American political terminology, the states that voted for Trump were the Red states, which has Republican majorities. These states comprise the political base upon which Trump relies for his Presidency’s survival and which he therefore must protect and promote.
In the age of the WTO, and after seven decades of experience with rules-based world trade governance, these should be no Trump-style tariff campaign. Trade wars are no longer supposed to happen.
Like all angry retaliators, the countries that are the objects of Trump’s tariff campaign will want to retaliate with maximum effect. Their retaliatory tariff will be targeted configured so as to hit Trump where he will be hurt most; these will be armed squarely at his political-base states.
Because Kentucky is one of the reddest of Red states, the EU and other retaliators are targeting for a tariff increase the special kind of whisky that Kentucky produces. Sensing the damage to his state’s Bourbon whisky industry, the US Senate majority leader, Mitch McConnel of Kentucky, has urged caution in the structuring of Trump’s trade wars. And knowing that some of Trump’s political-base states are in the farm belt, the crafty retaliators are targeting the agricultural products of those states, like sorghum, soybean, pork and fruits.
In the end, the retaliators’ tariff increases on exports of his support states are bound to hurt Donald Trump’s political standing. Were that to happen, Trump would have achieved a pyrrhic victory. He would have fulfilled his America First philosophy but at the cost of his Presidency.
But the far greater damage would be to the world economy: The diminution of world trade and the weakening of the concept of a rules-based world trade order.