As the Trade War Unravels, Will Real War Follow?

The jingoistic attacks on world trade by the Trump administration have already hurt economic growth in Europe. Europe, just starting out on an uneven recovery, could plunge into recession if world trade is disrupted further.

Oxford Economics in London estimates that a full-blown trade war, including auto tariffs, would shrink the European economy more than 1 per cent and cost 1.6 million jobs.

“A trans-Atlantic trade war would have a severe economic impact on both the European and U.S. economies,” Oxford Economics said in a report in August. “There would be no winners.”

Cost to the US of trade war with China and Europe? About $62 billion, according to Oxford Economics’ recent report.

Cost to the global economy of this disruption of trade? $800 billion, the report says. The result is the looming breakdown of an increasingly integrated global trading system that has, over the course of seven decades, been key to the development of the European and American economies, as well as driving the development of emerging markets.

Now this carefully developed system is unravelling. The World Trade Organization (WTO), which stands behind global trade, is under attack by the Trump administration, which is blocking the reappointment of its judges.

And, notes George Washington Law School Professor Steve Charnovitz, the Trump administration is illegally holding bilateral negotiations on trade with China, a direct affront to the WTO. “It’s frontier justice,” Charnovitz insists.

The WTO system has a basic tenet: It’s about reciprocity.

Says the Brookings Institution in a study: “The underlying principle of reciprocity that served to influence early trade negotiations after WWII turns out to have been an important international force allowing governments to coordinate and simultaneously lower trade barriers. Furthermore, this reciprocal balance of trade obligations across countries is what has allowed them to keep the trade barriers low toward one another, for the most part, over the past 60 years.”

Why Trade Agreements Make World Trade Work

We have grown accustomed to a certain level of economic ability thanks to reciprocal trade agreements.

But, back in 1930, most of the world did just the opposite. Starting with the US, and its Smoot-Hawley tariffs, nearly the entire developed world raised protectionist barriers.

“This led to the virtual halting of international commerce,” explains Brookings.

“Smoot-Hawley contributed to the early loss of confidence on Wall Street and signalled U.S. isolationism. By raising the average tariff by some 20 percent, it also prompted retaliation from foreign governments, and many overseas banks began to fail.

Within two years some two dozen countries adopted similar ‘beggar-thy-neighbour’ duties, making worse an already beleaguered world economy and reducing global trade. U.S. imports from and exports to Europe fell by some two-thirds between 1929 and 1932, while overall global trade declined by similar levels in the four years that the legislation was in effect.

In 1948, after the devastating effects of depression and war, the General Agreement on Tariffs and Trade (GATT) was signed by 23 nations. Ultimately, 150 signed, and this led to the creation of the WTO in 1995.

Through the GATT and WTO negotiations, the principle of reciprocity enabled trade relations among the participating countries to remain in balance. One of the issues that has arisen in recent years is that China’s not conforming to the reciprocity model, and, as Italian Prime Minister Giuseppe Conte has noted, this is why the WTO needs reform.

But reforming the WTO is one thing, destroying it is another – it goes against the very fabric of how international trade works today. International production activities have a new structure, and trade has restructured in consequence.

“Traditionally, trade was driven by the exchange of finished goods, but the dissemination of global value chains (where production is fragmented and dispersed across national boundaries) means that the exchange of components, machinery, and services represents more than two-thirds of the value of international trade,” Brookings explains.

“Two main policy implications should be readily apparent. One, imports are ever more essential to sustain export activities, making protectionism costlier. And two, leveraging the growth potential of the global value chain calls for international trade disciplines that match the reality of international trade operations.”

In other words, international trade is an integrated network. When disputes arise, the entire network is affected.

“The problem with the U.S.-China trade negotiations is that if the Trump administration’s numerous allegations against the Chinese government are valid, such misbehaviour adversely impacts all advanced economies, not just the U.S. Yet the bilateral nature of the talks allows U.S. negotiators to make ad hoc demands that could benefit U.S. interests (or special interests) to the detriment of other countries,” Charnovitz warns.

But the Trump administration, ignoring the entire basis on which international trade operates, simply imposes tariffs based on its conviction that China is “cheating.”

“The whole point of international trade law is that one country should not have the right to define what constitutes trade cheating,” writes Charnovitz.

Will Trade War lead to War?

There is certainly a real possibility that this could lead to outright war.

“A quote often attributed to the 19th-century French economist, Frédéric Bastiat, goes: ‘When goods do not cross frontiers, armies will.’ It is obvious that the current US-China trade war is stoking geopolitical tensions between the world’s two largest economies and chief political adversaries, as they become more confrontational over their discord on maritime issues in the South and East China seas and over Taiwan,” writes one commentator.

It would be wrong to ignore the possibility that this pattern first trade war and then outright war, could happen again.