(Bloomberg) -- U.S. President Donald Trump on July 6 made good on a threat to start a trade war with China by imposing 25 percent tariffs on $34 billion worth of Chinese imports. Trump said the levies were justified after decades in which China tilted the playing field, including by stealing American know-how. China immediately hit back with tariffs on an equal amount of U.S. goods. Barring talks in coming weeks, Trump says the U.S. will apply tariffs, which act like a tax on imports, to another $16 billion worth of Chinese goods, followed by $200 billion more. The final total could exceed $500 billion -- more than the U.S. bought from China in 2017. The U.S. already had imposed levies on steel and aluminum imports from most countries, including allies Canada, Mexico and the European Union. They reacted with tariffs of their own. It all adds up to an all-out trade war, one that risks gumming up global supply chains, driving up consumer prices, stalling economic growth and tying the World Trade Organization in knots.
1. What is a trade war?
The dictionary says it’s “an economic conflict in which countries impose import restrictions on each other in order to harm each other’s trade.” Trump’s tariffs and the retaliation by other countries, both threatened and enacted, meet this definition. But so do centuries of protectionist skirmishes by numerous countries in countless sectors. What makes this a full-blown trade war are Trump’s singling out of China for retaliation for intellectual property theft, the tit-for-tat actions by the U.S. and its closest allies over metal tariffs, and Trump’s invocation of national security to justify some of his moves -- which could open a Pandora’s Box of similar claims by other nations.
2. What happened in previous trade wars?
One of the most notorious examples is the Smoot-Hawley Act passed by Congress in 1930 that is often blamed for deepening the Great Depression. The law hiked U.S. tariffs by an average of 20 percent, initially to protect American farmers before expanding as other industries lobbied for protections. As demand collapsed, countries scrambled to maintain their gold reserves by devaluing their currencies or imposing even more trade barriers. Global trade fell off a cliff.
3. Who wins in trade wars?
No one, if history is any guide. When President George W. Bush in 2002 raised steel tariffs to protect against a surge in imports, they created a slight $30.4 million drag on U.S. gross domestic product, according to the U.S. International Trade Commission. Workers’ wages also fell economy-wide and investors saw lower returns on capital. The U.S. lost roughly 200,000 jobs, about 13,000 of which were in raw steel-making, by one estimate. A report by the pro-free trade Peterson Institute for International Economics estimated that Bush’s tariffs cost about $400,000 for every steel-industry job saved. The WTO also ruled that the Bush tariffs were illegal.
4. Why did Trump invite this fight?
In a March 2 Twitter post, he declared trade wars “good, and easy to win.” He repeatedly pledges to reduce the U.S. trade deficit, which shows the country imports hundreds of billions of dollars more than it exports. By the end of 2017, the U.S. trade deficit had risen to $568 billion from $505 billion in 2016. His administration has asked China specifically to reduce its trade surplus with the U.S. by $200 billion, more than half the 2017 total, which was a record-high $375 billion. Stepping back from trade deals like the North American Free Trade Agreement and the Trans-Pacific Partnership also appeals to Trump’s base of voters in America’s Rust Belt. But talk of a trade war is alarming to many U.S. business leaders, who largely support existing trade deals, and the securities markets, which fear lower profits and slower economic growth if the U.S. turns protectionist and other countries retaliate.
5. Could tariffs backfire on the U.S.?
They could. Take steel, for instance. Many more people are employed in industries, such as auto manufacturing, that buy steel to make products, than in steel-making itself. Some consumers may also have to pay higher prices. Trade tensions could boost inflation more than desired by Federal Reserve policy makers, who might feel the need to raise rates more aggressively than planned. On the other hand, if the tariffs result in job losses and the economy slows, the Fed might want to ease the pace of rate hikes.
6. When does the WTO get involved?
The U.S., China, Canada and EU have all started reaching out to the Geneva-based organization. China, Canada and the EU have filed WTO dispute complaints challenging the legality of Trump’s metal tariffs. Beijing has also launched a complaint over Trump’s imposition of tariffs on $34 billion worth of Chinese goods and his threat to hit more Chinese products in the coming weeks. Separately, the U.S. and EU have lodged WTO disputes challenging China’s technology transfer policies. Retaliatory actions that unfold quickly can test the WTO’s somewhat ponderous deliberative process, as resolution of a dispute can take years. Almost half of the cases filed to the WTO are resolved by the individual parties in mediation, before reaching the litigation stage.
7. How could the WTO help resolve the situation?
The arbiter of international trade disputes was born in 1995 out of a set of agreements struck by countries trying to reduce trade barriers. If a government’s complaint about another nation’s trade barriers is seen as grounded, the WTO recommends acceptable retaliation. But the U.S. and China both propose justifying tariffs under domestic law, rather than following established WTO procedures, which could undermine the WTO’s ability to mediate. In the case of aluminum and steel, Trump is invoking a seldom-used clause of a 1962 law that gives him the authority to curb imports if they undermine national security. His administration is studying whether to use the same law to justify restricted automobile imports. Other nations could copy the U.S. move.
8. Are tariffs the only weapon in trade wars?
No, there are many others. Clamping down on Chinese investments in the U.S. is one example. Intentionally weakening one’s currency is another. One big worry for the U.S. is that China, the U.S.’s biggest creditor, will scale back purchases of Treasuries, an option that China’s ambassador to the U.S. doesn’t rule out. Countries through the years have used other means to keep foreign goods out and protect homegrown companies, a practice known as mercantilism. Some practices are blatant, such as quotas and subsidies for domestic industries (which Trump accuses China of using); others are less public, such as unusual product specifications, lengthy inspections of goods at entry ports and intricate licensing requirements.
The Reference Shelf
- Trump’s pledge to slap tariffs on $50 billion of Chinese goods met with retaliation vow.
- QuickTake explainers on Trump’s claim that China stole U.S. intellectual property and the 1962 law Trump cited for his steel tariffs.
- Bloomberg Economics says an all-out global trade war could cost economies about $470 billion by 2020.
- The “nationalists” are back in power in Washington.
- Why Trump’s steel and aluminum tariffs might set a bad precedent.
- China stands to gain from Trump’s steel tariffs, Michael Schuman writes in Bloomberg View.
- How Trump’s tariffs could aim for China but hurt U.S. allies more.
©2018 Bloomberg L.P.