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 with their own tariffs, the global trade picture remains uncertain. The IMF and the World Bank Spring Meetings set off amid US-Japan bilateral negotiations and Trump’s hot-and-cold approach to the TPP. This week we review blogs’ views on tensions over international trade and how they can impact world economic growth.

By: Date: April 23, 2018 Topic: Global Economics & Governance

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.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic

Blog Post

Hong Kong’s economy is still important to the Mainland, at least financially

Hong Kong’s current situation is important for the world in as far as its role as major offshore financial centre is key for China’s inbound and outbound investment and financing. Capital outflows from Hong Kong are especially risky given Hong Kong's so far useful but rigid monetary regime, namely a peg to the USD under a currency board

By: Alicia García-Herrero and Gary Ng Topic: Global Economics & Governance Date: August 19, 2019
Read about event

Upcoming Event

Sep
9
08:30

China-EU investment relations: Exploring competition and industrial policies

This is a closed-door workshop jointly organised by MERICS and Bruegel looking at China-EU investment relations.

Speakers: Alicia García-Herrero Topic: Finance & Financial Regulation, Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More by this author

Opinion

The Coming Clash Between Climate and Trade

The new leaders of the European Union, who have relentlessly championed open markets, will, ironically, likely trigger a conflict between climate preservation and free trade. But this clash is unavoidable, and how Europe and the world manage it will help to determine the fate of globalisation, if not that of the climate.

By: Jean Pisani-Ferry Topic: Energy & Climate, Global Economics & Governance Date: August 1, 2019
Read about event More on this topic

Upcoming Event

Oct
29
08:30

Bank resolution: its impact in the EU

Closed-door workshop on various aspects of bank resolution.

Speakers: Jon Cunliffe, Martin J. Gruenberg and Elke König Topic: Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Opinion

A reflection on the Mercosur agreement

The EU accepts the deal because it is worried about the catastrophic scenario of a world without the WTO.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: July 26, 2019
Read article More on this topic More by this author

Blog Post

The consequences of Switzerland’s lost equivalence status

Due to a spat between the European Commission and the government of Switzerland over the negotiation of an institutional framework agreement, equity securities that are listed on Swiss exchanges are banned from being traded on stock exchanges in the European Union. This blog post reviews the background of this incident and assesses the consequences for companies listed in Switzerland as well as EU investors investing in Swiss equity securities.

By: Michael Baltensperger Topic: European Macroeconomics & Governance Date: July 25, 2019
Read article More on this topic More by this author

Blog Post

Modernising European Competition Policy: A Brief Review of Member States’ Proposals

French, German and Polish governments have jointly proposed options for modernising EU competition policy. The debate to recalibrate European competition rules was already well underway. So, it is not surprising that proposals are consistent with other statements made by France and Germany. Yet, proposals do not address current issues weighing on the international competition community, such as conglomerate effects theory or algorithmic collusion.

By: Mathew Heim Topic: Innovation & Competition Policy Date: July 24, 2019
Read article More on this topic

Opinion

EU policy recommendations: A stronger legal framework is not enough to foster national compliance

In 2011, the EU introduced stricter rules to monitor the implementation of country-specific policy recommendations. Using a new dataset, this column investigates whether these new laws have increased national compliance. There is no evidence that these stricter processes matter for implementation rates, whereas macroeconomic fundamentals and market pressure are important determinants of implementation progress. These results suggest ways to improve the effectiveness of European policy coordination that go beyond stronger legal processes.

By: Konstantinos Efstathiou and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: July 23, 2019
Read article Download PDF More on this topic More by this author

External Publication

An Effective Regime for Non-viable Banks: US Experience and Considerations for EU Reform

The US regime for non-viable banks has maintained a high degree of stability and public confidence by protecting deposits, while working to minimise the public cost of that protection. EU reformers can draw valuable insights from the US experience. A review of the US regime supports arguments in favour of harmonisation and centralisation of bank insolvency proceedings and deposit insurance in Europe’s banking union.

By: Nicolas Véron Topic: Finance & Financial Regulation Date: July 22, 2019
Read article More on this topic

Blog Post

China’s investment in Africa: What the data really says, and the implications for Europe

China has clearly signalled to Europe that it does not shy away from involvement in Africa, historically Europe’s area of influence. But the nature of China’s direct investment flows to the continent will have to change if they are to prove sustainable.

By: Alicia García-Herrero and Jianwei Xu Topic: Global Economics & Governance Date: July 22, 2019
Read article More on this topic More by this author

Opinion

The EU needs a bold climate strategy

Scientists report that global temperature increases must be limited to below 1.5 degrees Celsius. With global greenhouse gas emissions continuing to increase and rising temperatures driving up the frequency of extreme weather events, the world needs a greater commitment to climate policy.

By: Guntram B. Wolff Topic: Energy & Climate Date: July 19, 2019
Read about event More on this topic

Past Event

Past Event

The 4th industrial revolution: opportunities and challenges for Europe and China

What is the current status of EU-China relations concerning innovation, and what might their future look like?

Speakers: Elżbieta Bieńkowska, Chen Dongxiao, Patrick Child, Eric Cornuel, Maria Demertzis, Ding Yuan, Luigi Gambardella, Jiang Jianqing, Frank Kirchner, Pascal Lamy, Li Mingjun, Gwenn Sonck, Gerard Van Schaik, Reinhilde Veugelers, Wang Hongjian, Guntram B. Wolff, Xu Bin, Zhang Hongjun and Zhou Snow Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 12, 2019
Load more posts