(Bloomberg) -- The opening salvos have been fired. President Donald Trump ordered up tariffs on steel and aluminum imports and, pending a public-comment period, plans tariffs on still more products from China, in retaliation for what he calls decades of intellectual property theft. China responded with tariffs of its own and threats of more. Economists see a risk that the world is headed toward an all-out trade war, one the World Trade Organization may be ill-equipped to respond to.
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’s stoking fears of a full-blown trade war this time are Trump’s singling out of China for retaliation for intellectual property theft, the tit-for-tat actions by the U.S. and China over steel tariffs, 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 -- and the possibility of Europe becoming a second front.
2. What happened in previous trade wars?
One of the most notorious examples is the Smoot-Hawley Act passed by Congress in 1930 and often blamed for deepening the Great Depression. The law hiked U.S. tariffs by an average of 20 percent, initially to protect American farmers but then broadened 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 raised steel tariffs in 2002, U.S. gross domestic product declined by $30.4 million, according to the U.S. International Trade Commission. The U.S. lost about 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 World Trade Organization 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," though later he denied the U.S. and China are in one. He’s determined to reduce the U.S. trade deficit, which shows the country imports hundreds of billions of dollars more than it exports. He has asked China specifically to reduce its trade surplus with the U.S. by $100 billion, more than one-fourth 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. Who else might retaliate?
While Trump temporarily exempted allies -- including the European Union, Canada, Mexico and South Korea -- from the metals tariffs, he expects concessions in return. Should that arrangement fail, the EU warned it could levy 25 percent tariffs on $3.5 billion of American goods. If that were to happen, Trump said he would impose a 25 percent penalty on European car imports.
6. 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.
7. When does the WTO get involved?
The U.S. and China have both taken initial steps. The U.S. filed a "request for consultations" at the WTO on its concerns over technology licensing; China notified the WTO it will challenge the legality of U.S. tariffs. Retaliatory actions that unfold quickly can test the WTO’s somewhat ponderous deliberative process, as resolution of a dispute can take 12 to 18 months. Almost half of the cases filed to the WTO are resolved by the individual parties in mediation, before reaching the litigation stage.
8. 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 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. Other nations could copy the U.S. move.
9. Are tariffs the only weapon in trade wars?
No, there are many others. Clamping down on Chinese investments in the U.S., which Trump is already doing, is one example. Talking down, or manipulating lower, 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 overt, such as quotas and subsidies for domestic industries (which Trump accuses China of using); others are covert, such as unusual product specifications, lengthy inspections of goods at entry ports and intricate licensing requirements.
The Reference Shelf
- A timeline of the escalating U.S.-China trade dispute.
- 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.