This Is How Trade Wars Happen

The Trump administration has decided to impose $60 billion in new tariffs on Chinese goods coming to the US, as well as new restrictions on Chinese investment in the US. China has responded with a promise to impose $20 billion of the same on products such as fruit, nuts, wine, seamless steel pipes, and 115 other products. The reason: to “balance out the losses sustained by China through the United States’ increased tariffs on steel and aluminum imports,” a China statement said.

But there is more about to happen. China has just begun. There is talk of an additional retaliatory measure of 25% tariffs that could hit hundreds and thousands of products. The US has granted exceptions on tariffs so far to Mexico, Canada, Europe, the UK, and Australia, but with regard to China, the line has so far been very hard. It’s empire vs. empire.

You look at what’s happening and wonder what happened to stop and then reverse the decades of progress that have been made in reducing tariffs, culminating in the dispute-settlement systems of the World Trade Organization. The short answer is that the US has decided, unilaterally, to ignore them completely, basically acting as if the thing that the US establishment worked so hard to create doesn’t exist. And even as this is happening, many other nations in the world are forming their own free-trade alliances that exclude the US from the process completely.

As an aside, at the time, I was highly skeptical of the WTO when the US Senate agreed to join, thinking it would become a tool of American imperialism. I was especially wary of its “intellectual property” provisions that the US added as a condition of approval. It turns out that I was wrong: it did indeed become a tool for peace in the world, simply by providing some measure of accountability. The IP provisions are more moderate than what the US is seeking today.

Who Pays?

Trade wars are not free like beer. Someone is going to pay. The answer is simple: you, me, and everyone. Tariffs are an application of the coercive power of the state. They are not really imposed on other countries. They are imposed on a government’s own citizenry as taxes on goods coming and going across borders. Governments that impose them are pushing prices higher – and production lower – on all goods, not just the imported ones but the ones produced domestically that rely on outsourcing some aspects of the production process. Trade wars are not “won”; they are fought at the expense of the consuming public in all countries.

There can be no question who has started this one. It is Donald Trump, believing himself to be living up to his campaign promise. I’m sure many people took it seriously. I certainly did at the time and wrote an entire book about the illiberal implications of longing for national autarky. The short answer is that it strongly suggests ideological attachments that are contrary to the rule of law and freedom in general. The decline of mercantilism and the advent of free trade was essential to the birth of the prosperity we know.

Many people had hoped that Trump, as a businessman with long experience with outsourcing and importing, would clearly see how damaging this approach to public policy would be. Surely, this was just campaign fodder. After spending the first year of his presidency mostly focussed on deregulation and tax cuts, the possibility that he would conveniently forget his protectionist longings seemed actually high. But it turns out to be a forlorn hope: as soon as Trump believed that he had the political capital, he moved hard and destructively.

Wrecking the Markets

What’s extremely bizarre is that Trump is personally ignoring the reality that the financial markets, which rallied so hard at the tax cuts and deregulation of 2017, are in revolt against this protectionist turn. Journalists who cover Wall Street are failing to find voices willing to claim that the emerging trade war has nothing to do with the rise of the bears. Traders in all countries are warning of a coming disaster. And it seems that every analyst is on record directly blaming these policies for turning back fully 4 months of gains in all indexes.

To be sure, some people are indeed cheering. Those who have complained for years, if not decades, about China’s laxity concerning “intellectual property” are now getting their way. They may rue the day. It’s true that American software firms and automakers become annoyed when their US-patented products and services are so easily copied for cheaper production processes in China. But the truth is that “intellectual property” cannot be easily enforced across borders without what used to be called gunboat diplomacy.

And no one dares tell the truth: American consumers have benefited enormously from the failure to enforce patent, copyright, and trademark in emerging economies. It’s been a huge source of China’s growth, absolutely, but also a reason you are able to get cheap electronics and replacement parts for all kinds of machinery.

Keep in mind that intellectual property doesn’t exist in the material or digital world; it is created solely by legislation and would be unenforceable at all but for state power. This is because, unlike real property, ideas are infinite goods; once created and revealed, they can be shared by the whole of humanity forever.

The People Cheer

The protectionist turn has not become as serious as that which entrenched the Great Depression or heightened tensions that led to the Civil War. But it does signal a reversal of 70 years of progress toward freer trade.

It’s not a time to panic yet but many people who were fired up about the Trump administration last year are now wondering why they didn’t see this coming. However, my own look through Twitter and Reddit reveals something more alarming: many people are cheering all of this as a glorious show of strength by Trump, as if he is standing up for American interests. It’s the symbol, not the reality, that matters here.

In a political sense, Trump might be onto something, temporarily, in the most cynical way. It is very easy for the hoi polloi to think in terms of national collectives. It’s us vs them, our guys vs. their guys. The trouble is that the world is no longer organized primarily along these nationalistic lines. We all depend on the productivity of each other and therefore on trade with each other, regardless of the nation states that trap us in their borders. The other main problem with trade war: it is a ruse to distract citizens from their real oppressor which is their own government.

Who is going to get the blame when prices rise, productivity falls, and the US falls into recession? Trump can blame China for its tariffs. Politically, however, this could turn against him, as he will no longer be able to cite economic performance as proof that he has made America great again. Looking ahead to the next round of political change, this can only help Democrats, who might end up retaking Congress and the White House and seeking to reverse the tax cut and deregulation of Trump’s first year, thus doing further damage.

Cut or Expand Government

In other words, this protectionist turn threatens absolutely everything. This is not surprising. More freedom means more prosperity; the reverse is also true. If you cut government in many ways, and vastly increase its presence in other ways, you threaten to wipe out the good you have done. This is what the protectionist turn has done. Tragically, because the trade power has been centralized in the executive state, no one can do anything to stop it: not Congress, not the Supreme Court, not hoards of lobbyists. This is the problem when you have centralized power combined with a lack of political humility: one man can blow up the world.

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Jeffrey A. Tucker

Jeffrey A. Tucker is Editorial Director for the American Institute for Economic Research. He is the author of many thousands of articles in the scholarly and popular press and eight books in 5 languages. He speaks widely on topics of economics, technology, social philosophy, and culture. He is available for speaking and interviews via his emailTw | FB | LinkedIn