Are We on the Brink of a Trade War?

Since David Ricardo and other economists outlined the advantages of free trade about 200 years ago, it seems like recently, many of his lessons remain unlearned. In a time period where we see the advancement of populist movements on several fronts, “unfair trade” has become an easy scapegoat for right-wing grievances.

The suggested recipe – most recently proposed by the current U.S. President – is introducing higher import tariffs, which are protectionist tools against free competition. The effects of these measures are debated among economists, but the majority is skeptical that the potentially ensuing trade wars can lead to anything positive. On the contrary, sometimes they have led to real wars.

So now, at the threshold of a possible new trade war, what is the outlook? Will and should China and the EU react in kind to the introduction of new customs fees for steel and aluminium? Is it plausible that trade deficits are an issue of “national security”, as the U.S. president claims? Should concerned countries accept trade imbalances and customs fees, or should they risk further escalation by implementing further tariffs in response?

– Klaus Segbers

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  1. Thilo Bodenstein 7 months ago

    This week the US announced a drastic increase of tariffs on imports from China. Europe may soon be targeted by US import tariffs. Whatever the economic rationale behind this move, Europe should refrain from retaliating by imposing counter-tariffs. This is a test for one of the few truly multilateral organization, the World Trade Organization (WTO). Since its inception the WTO’s Dispute Settlement Body has adjudicated on more than 500 cases. No major trade wars had to be fought. The recently imposed US import tariffs will eventually also be brought to the Dispute Settlement Body, unless President Trump wants to dismantle the WTO altogether. But if the WTO prevails the current trade war may actually strengthen the multilateral trading system. The EU, China, India and other countries will understand that sustainable global trade depends on the WTO and its development, not on regional or bilateral trade agreements.

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  2. Alexei Voskressenski 7 months ago

    We are not on the brink of the trade war, we are in the process of the trade and production rebalancing. It is a start of a difficult restructuring for a Chinese economy system, but China is now well prepared for it. It will may be also no less difficult for the USA, because the cheap production chains that must be reconstructed now on American soil, will not necessarily bring high end wages when the production is becoming robotized and automated. But this is nessessary and is a chance as well as a challenge.

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  3. Justas Paleckis 7 months ago

    Trump is not the first US president to try to launch "trade wars." 15 years ago, his predecessor did not succeed and was forced to step back. The current US president is one of those tough guys who do not pull back. In addition, he must carry out what he promised before the election. The threats of the EU and China to take retaliatory measures on the introduction of new customs fees and other Trump’s steps, I think, will be implemented. Trade wars can not lead to anything positive indeed. As the international tension rises, additional sparks can inflame the real wars. Of course, it would be useful to increase WTO powers and to reach an international agreement that would limit the possibilities for "trade wars". But the most powerful country in the world is unlikely to want this. Even after the end of the current presidential term.

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  4. Tobias Lechner 7 months ago

    There is some truth in Trump's anger about high import tariffs in Europe on some American products. A trade war between both parties, however, would create two losers and benefit third parties. Instead, the U.S. and the EU could decrease tariffs and be two winners instead of two losers. This may also be the best reply to the current "clash of systems", with liberal-democratic states (with institutionalized power) on one side and the autocratic temptation (with predator elites) on the other. Liberal-democratic states should finally make an economic step towards all countries that share similar values, and thus combine political values, security needs and economic interests into a single strategy. Free-trade agreements (FTA) such as the one between the EU and Japan (JEFTA) could be a model for similar trans-atlantic and trans-pacific FTAs, always in combination with a welfare system that compensates FTA losers. The answer to Trump is not more but less tariffs. Less is more!

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  5. Friederike Kies 7 months ago

    I agree that recent trends of protectionism give reason to worry. A possible trade war will only lead to disadvantages on all sides. However, whether these trends of protectionism will lead to a possible trade war ultimately depends on the future measures taken by all parties involved. I believe that affected countries should not simply wait and accept these disadvantages. Rather, the EU and China should unite and jointly engage in diplomatic relations with the U.S. Clearly stating that protectionism is not in anyone´s interest, they could then highlight the possible European and Chinese responses that might follow American measures. Moreover, the EU and China should emphasise the benefits that free trade has for the U.S. Concluding, I believe that the parties involved shall try to work with one another rather than against one another, by suggesting new possible areas for future cooperation and highlighting the advantages such cooperation will entail for everyone.

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  6. Mina Sumaadii 7 months ago

    Considering the mostly negative scenarios of what trade wars lead to, it seems that ‘wait and see’ strategy might be the best in the current situation. At least first until November to see the results of the U.S. Congress elections. According to the clock (https://howlonguntiltrumpleaves.com/), we still have to wait ~1030 days until President Trump leaves office. However, November elections are going to determine which party will be in control and how far the investigations on his connections with Russia would go.
    Nonetheless, as a retaliation to Thursday’s imposition of tariffs on steel and aluminum products from China, there are already reports of a retaliation. On Friday morning the Chinese Ministry of Commerce announced tariffs on products from the U.S. that are likely to hit its agricultural sector (aka Trump’s supporters). While some commentators call the retaliations as cosmetic and modest, these tariffs are going to hit Trump’s electorate and that might do the trick. Also, there is a report that China would pursue further legal action under the WTO framework. In the WTO most complex disputes’ last years, thus, maybe this would be a potential strategy to buy time until the U.S. elects a less protectionist president.

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  7. Anastasia Wischnewskaja 7 months ago

    The problem with what President Trump is doing and saying now concerning trade is not the content, but the form. He made himself such an outrageous and unpopular figure abroad, that even the actually correct things he says and does cause alienation among journalists and broader audience. It is true that the EU has higher tariffs for certain goods, than the USA and it certainly needs to be addressed. However, as he questioned transatlantic solidarity on multiple occasions and killed TTIP, his complains about unfair trade conditions are faced with nothing but annoyance. His recent decision to impose heavier tariffs only on China, however, while putting similar measures against Europe on hold, is a good sign. With the new German trade minister on his way to Washington and willing to negotiate, a trade war can be averted. Higher tariffs against China, on the opposite, are a perfectly legitimate measure, which grasps only a tiny part of the problem. Imbalance in trade and investment conditions with China are structural and stem from a dramatically different understanding of the role of state in economy. The USA and EU would be wise to join forces to push for a more balanced market access and more transparency concerning state interference in economy in their economic relations with China.

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  8. Stephanie von Kanel 7 months ago

    The concept of 'free trade' very much contradicts the protectionist and tariff-imposing measures Trump is implementing; a standpoint the US can only take because of their status as the world's largest economy. However, there is nothing to stop other export dominant countries such as China, Germany, Japan or France to name a few from adopting this form of 'term-and-conditioning'. Ultimately it is up to these governments how they respond, though from observing the EU and China's most recent official press conferences, it seems this is outside of their interests, at least for the time being. Despite the US's 'supreme-power', nation-states should not forget their own collective power and adopt a form of trade-solidary, hopefully, maintaining the status quo as much as possible. However, Trump has mentioned certain ally countries, like Australia, will be exempt from tariffs. This combination of protectionism and perceived favouritism could have significant effects on international relations and regional trade stability. Moreover, commercial rivalries between global markets are likely to arise. This may lead to contested and hostile economic relations, which given the socio/political climate at the time could cause temporary or long-term disruptions in IR between nation states, as well as interfering with the availability of necessary commodities and thus the security and livelihoods of domestic populations.

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3 Comments

  1. Chen Monysoksaroth 7 months ago

    For the term of trade of war between the two superpowers, China and the U.S. are now seemed to facing with the conflict with each other and their tension relating to the trade. Obviously, these two powers back then also have been faced this similar situation in 2004. Fortunately, that time, there had no any serious conflict that led them to open to war or something. However, talking about the current situation under Trump’s administration, U.S. starts imposing tariffs to china and this time is seemed to be more serious since Trump is way different from other presidents in U.S. As we all know, Trump today is trying to lobby and make the world turning to the chaotic situation. Back to the topic, I think if there has really “trade of war” happened, there won’t has any benefit to both of them. The two are depended on each other and if they have trade of war, they will both lose to it, and the benefits will go the third parties who just stay still and get advantages without any effort, but U.S’s president is too arrogant and he always raised on how to make American Great again and cause the world now to go to anarchy and even economics are just favored to American who always stating themselves as the father of democracy.

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  2. ENGLY KHUN 7 months ago

    I agree on the idea of "free trade" even there is the populist movement to show of the progression of the “unfair trade” in the term of “free trade” is the source of unsecure of nations to be protectionism. Free trade is the free flow of products and free competition as the potential of each state that they are follow of liberalism which stated itself compete free and fair. If we go to see an idea of populist on “unfair trade” as a scapegoat for right-wing grievances with the example by U.S president to use the tool as protectionism from outside countries. Now, the possibility of new trade war cannot be happened in term of the U.S is the deficit stated which U.S citizens would prefer to buy products for outside instead of the domestic product. And if the products of China have increase by tariff still not higher cost as domestic product in U.S. For case of China on “national security” as the treat to U.S I can say that it is not the concern to U.S in term of the new technology of U.S weapon on new development.

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  3. Nguyen Huyen Chang 7 months ago

    Personally, I do think that a new trade war will happen, but maybe not too big and not too long, either. To say “should”, I will say EU and China should not react in kind to such introduction of new customs fees for steel and aluminium from the Trump’s administration, however, I think they will do so since the current evidence shows that from “war” and economic perspective, Trump is quite effective, especially with the way how he have taken money back both directly and indirectly to called “American people”.
    But to say an issue of “national security, I will state that it is a bit exaggerated, especially to China since China’s domestic product price before exported is still lower than its price after the new tariffs.
    To accept unbalances in trade and to launch a new war trade as well as further escalation all have never ever been good ideas because whoever is going to be the winner in the case, all parties involved will be the looser to the third unrelated/ rest party.
    EU and China of course should have their stronger voice on the Trump’s claims and shows evidence of fair free trade as well as use WTO as a tool to reduce the voice of the U.S under Trump administration. Around over 1000 days more until the U.S Congress Voting , it seems to me that the best way is to “buy time” which means to try best to deal with Trump in kind before this election.
    Not only so, the back-up plan in case that Trump still takes power after the election should be counted. EU and China have to think about two options, firstly is to deal the trade with Trump economically rather than referring back to the past relationship with the U.S and second, is to find for another source of output in short-term future.

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