Blog post

Trade Wars: what are they good for?

Following the US announcements in early March of their intent to impose steel and aluminum tariffs, and the subsequent threats from China to retaliate

Publishing date
23 April 2018

Notwithstanding the momentum felt in the world economy, the IMF is concerned about the rising threats of protectionism and trade tensions, as well as their impact on economic growth. As Maurice Obstfeld writesthe prospect of trade restrictions and counter-restrictions threatens to undermine confidence and derail global growth prematurely. 

To compound this, trade disputes may shift the focus from needed economic reforms. That major economies are flirting with a trade war at a time of widespread economic expansion may seem paradoxical­—especially when the expansion is so reliant on investment and trade. The Director of Research of the IMF then links this with the asymmetric benefits of economic integration and how they were perceived by households. On the recent US bilateral negotiations, Obstfeld says that they will do little, however, to change the multilateral or overall U.S. external current account deficit, which owes primarily to a level of aggregate U.S. spending that continues to exceed total income.

This point is supported by Martin Wolf, who adds that the intellectual framework of US trade policy is displayed in the forecast that, far from shrinking, the US current account deficit will expand as a result of the fiscal boost. That would not stop Donald Trump, US president, from blaming perfidious foreigners. Geopolitical tensions remain a long-term risk, even if for now protectionist noises from the US, [did not prevent] upgrades in the expected growth of the volume of world trade. 

This global uncertainty feeds into the stock markets, as Paul Krugman explains: Whenever investors suspect that Donald Trump will really go through with his threats of big tariff increases, provoking retaliation abroad, stocks plunge. Every time they decide it’s just theater, stocks recover. Markets do not respond well to allusions to a trade war as businesses have invested heavily on the assumption that a closely integrated global economy is here to stay, and a trade war would leave many of those investments stranded.

But while the US has been in the spotlight, Legge, Lukaszuk and Eventt write in Vox EU that other trading partners have in the past raised tariffs on Chinese trade without such media buzz. The EU removal of China from its General System of Preferences in 2012 was reflected in a raise on products from China between 2013 and 2015, resulting in what the authors estimate to be $4 billion of additional customs revenue. The latter is a formal system of exemption from the general rules of the WTO to lower tariffs for poor countries, without also reducing tariffs for rich countries. Importantly, each country unilaterally decides which countries and products can benefit from GSP. 

Legge et al. conclude that the removal of China from the list of GSP-qualified countries had a significant fiscal effect and question that the contribution of customs revenue to the EU’s budget may reduce the bloc’s incentive to liberalise trade, especially in light of revenue losses following Brexit.

When it comes to EU-US relations, Simon Nixon warns that the expiry on May 1st of the EU’s temporary exemption from steel and aluminium tariffs may be a sensitive point: The EU wants the exemption to be made permanent, but the US government has made clear that it is seeking concessions in return. It regards the current EU-US trade relationship as unbalanced and unfair. The Trump administration typically assesses the health of US trading relationships through the prism of the current account and last October it cited Germany’s bilateral surplus with the US as “sizeable and a matter for concern”. (…)Brussels says that it is willing to discuss the wider trade relationship, but only after the US has unconditionally made the exemption from the tariffs permanent.

Pascal Lamy, former WTO chief, sees two ways of ending current tensions, depending on what Trump is actually doing. Recent announcements may have the intent of negotiating bargaining power. However, should the US president’s intention be to effectively pursue bilateral and not multilateral trade, the adequate reaction by U.S. trade partners would be to join forces in order to protect the multilateral trading system from U.S. aggression. Making it clear that this is plan B is probably the best tactical option for the rest of the world in order to make sure that plan A — improving the multilateral, rules-based trading system instead of destroying it — is the game that Trump plays.

Joseph E. Stiglitz argues that today’s trade conflict reveals the extent to which America has lost its dominant global position. (…) China has already surpassed the US in manufacturing output, savings, trade, and even GDP when measured in terms of purchasing power parity. And furthermore, it may take the lead in Artificial Intelligence. In the years ahead, we are going to have to figure out how to create a “fair” global trading regime among countries with fundamentally different economic systems, histories, cultures, and societal preferences.

About the authors

  • Inês Goncalves Raposo

    Inês Gonçalves Raposo is an Affiliate Fellow at Bruegel in the areas of European macroeconomics, governance, finance and financial regulation. Previously she worked for the Financial Stability Department of the Bank of Portugal. Inês holds a MSc in economics from Nova SBE with a major in Macroeconomics and Financial Markets and a BA in applied mathematics from the University of Lisbon.

    Her research interests include political economy, monetary and fiscal policy and applied macroeconomics. She is a native Portuguese speaker and is fluent in English and French.

    Declaration of interests 2018

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