World economies are honing their swords for a tariff fuelled trade war, the like of which has not been seen since the post-Depression, pre-war era, some 80 years ago. Led by the personal views of the US President, successive statements from the global production and consumption super-powers suggest the established order of world trade may be tipped on its head in coming months.
Proceedings commenced with the announcement of long-foreshadowed US tariffs on imports of steel and aluminium. Announced in typical shorthand, responses from supplier nations were swift and proportionate to their status. China was restrained and steely eyed and Europe lost its rag and threatened immediate tit-for-tat. Smaller nations like Australia, appropriately given the circumstances, rushed to the US to seek special exemptions.
One could not help feel that Australia’s efforts were a little like villagers racing cap in hand to the market to display their wares to the feudal lord, and to beg for a piece of his action.
The Australian steel and aluminium foray was very successful, and it was the right strategy. It was not, for instance, a victory repeated by nations like Japan however, which is still scrambling for its position to be retained. They are not expected to be successful.
It seems plain that those imposing the largest tariffs on the US or who have been slow to reduce their tariff and non-tariff barriers to trade, are at a disadvantage in the pre-emptive policy positioning of the US.
Like most opening skirmishes in a war, the protagonist played a bold hand, seeking to elicit information on the strengths and weaknesses of their main opponents. In this instance, the US flushed out its opponents, and was quickly reminded of its natural allies.
But the rest of the world, most notably the European Union, was aghast, and not just because of the impact on steel and aluminium.
As Tony Walker, the former editor of the Australian Financial Review wrote in ANZ bluenotes news service:
“…ministers have sought to make the best of an irrational process which puts at risk a rules-based global trading system painstakingly constructed – with American leadership – since the promulgation of the General Agreement on Tariffs and Trade (GATT) in 1948.”
The tariffs themselves are important enough, but what is proving to be of deep concern, is the intention to revert to failed, proto-nationalist protectionism that slows the wheels of global trade to the point where economies are unable to develop and demand goes unmet.
It is this, Walker argues, that contributed to the disastrous European conflicts of the first half of the Twentieth Century. Little wonder the European Union was so assertive of its retaliatory intent.
President Trump’s desire to bring down established institutions like the World Trade Organisation (the successor to the GATT) is a rejection of the rule of law, designed to destabilize the US’s trading partners. However, as Walker points out, the WTO is a moderating influence less of the US, whose mature trading positions and stances are well understood, and more of the emerging trading nations.
Specifically Walker says the US runs the risk of “…upsetting a delicate trading balance at a moment when a mercantilist China’s rise is unsettling the global system.”
For their part, the European riposte was to propose tariffs on US produced goods, including agricultural and steel products. Trump doubled down and said the US would raise tariffs on European cars. Thus it begins, and so it expands.
President Trump’s intuitive distrust of global trade agreements and bodies is not without its rationale, for a man who favours ‘free trade’. Whatever one might say of the advantages and moderating influence of the trade system headlined by the WTO, it has not entirely removed trade imbalances.
Equally, agreements on trade, typically aimed at reducing tariffs, have the effect of opening up global and regional markets in ways that can be characterized as prejudicial to established interests.
The US is thus exploiting the weaknesses in the system and, whether deliberately or otherwise, painting a picture of global trade agreements that is at lest a little disingenuous.
For smaller economies like Australia, the risk of a trade war is all the more troubling because unlike the principle protagonists, Australia’s economy does not have sufficient momentum to sustain its own growth for very long. This is all the more difficult for a handful of countries – Australia is a very good example – which have large trade positions with both China and the USA.
The potential disaster could see raw resource exports to China being curtailed because US markets become closed to Chinese products. At the same time, US products that were shipped to China could place Australian manufacturing under pressure.
That is just one scenario that sees a smaller country’s interests damaged by a super-power trade war.
Unintended consequences – the splatter of loose shot from unilateralism – are just one reason why trade wars provide little upside, but plenty of potential pain. They are best avoided. Just ask the global leaders who in the cold dawn enlightenment at the end of the Second World War, established the first global rules for trade.
