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Trump has no idea what trade wars actually look like. It's not pretty | View

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Trump has no idea what trade wars actually look like. It's not pretty | View

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Damir Sagolj
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By Marc-William Palen

In 1927, George and Ira Gershwin premiered an early version of a musical satire about trade wars called "Strike up the Band." The musical centers around an American cheese maker who wants to corner the dairy market at home. He persuades the U.S. government to put a massive tariff on imported cheese. When Switzerland objects to the tariff, the two countries end up going to war — for real this time.

While the U.S. is unlikely to pitch battle over trade in 2018, talk of an oncoming trade war — most recently with China — has American markets plummeting and allies grumbling.

Wars must have winners and losers, and when we talk about the losers of trade wars, we often think about things like high prices for consumers, businesses going bust because they can't sell their products abroad or import the things they need, etc. But, looking back through history, the geopolitical fallout from trade wars also suggests that there are few, if any, winners at all.

The current global tug-of-war has been going on for close to a year, but tensions have ratcheted up recently due to a contentious round of tariffs. This makes sense: The age-old weapon in any trade war is the tariff, a tax on foreign goods coming into your country. In March, Trump announced tariffs on Chinese steel imports and imported aluminum. Then earlier this month, China responded with its own tariffs on U.S. goods including recycled aluminum and pork.

Historically, taxing foreign goods with tariffs was the main way governments raised revenue. But tariffs can also be used to protect domestic industries from foreign competition.

The logic here is that if you slap a big enough tariff on a foreign product, it will discourage or even prohibit foreign companies from competing in your domestic market. Your domestic producers, like the cheese maker in the Gershwins' "Strike Up the Band," get a leg up because consumers will have little choice other than to buy their stuff.

In theory, the protected producer can then charge more for their products, hire more workers, and pay them higher wages. And some economists like Ha-Joon Chang in "Kicking Away the Ladder" argue that developing countries can benefit from protecting their nascent industries from the full force of global market competition.

But it's also this kind of tariff — the protective tariff — that can spark trade wars, as we've seen with the U.S. and China. You slap a tariff on my products, and I'll slap one on yours. And so on.

The Canadian-American trade wars from the late 19th century highlights the potential downsides of this cycle — and may be instructive for the current situation as well.

Bear in mind that, while the GOP nowadays is commonly viewed as the party of free trade and free markets — before Trump at least — this wasn't always the case.

In the late 19th century, when Republicans dominated the White House, the GOP was still the proud party of protectionism. And it took special enjoyment in targeting Canada with protectionist measures, following which Canadian protectionists sought to pay the U.S. back through tariff retaliation.

Trade retaliations escalated. Canadian-American relations worsened. Speculation on both sides of the St. Lawrence was that military conflict would soon follow. By the end of the century, a frustrated and spiteful Canada would instead strengthen its trade ties with Britain, which had stayed out of the fray. America's loss was Britain's gain.

But probably the most famous trade war in modern times was triggered by something called the Smoot-Hawley Tariff Act, which became law in 1930. It put taxes on thousands of imports, from grain to goldfish. (Yes, goldfish.) America's old trading partners were quick to retaliate in kind.

The unanticipated fallout was palpable. In Italy for example, U.S.-made cars were vandalized on the streets, tariffs were raised and U.S. exports to Italy plummeted. The Italian leader, Benito Mussolini, also fought back against the Smoot-Hawley tariffs by rushing into a trade deal with Soviet Russia. The two countries sealed their friendship with a nonaggression pact two years later, illustrating once again the unintended geopolitical consequences of trade wars — on this case of turning allies into enemies. Only this time, America's loss was Soviet Russia's gain.

Immediately after World War II, the United States took the harsh historical lessons of Smoot-Hawley to heart, and, in concert with other world leaders, undertook a sweeping overhaul of the global economic system to foster trade liberalization. This was done in no small part in the hopes of avoiding another tariff war like that of the 1930s (not to mention the world war that followed).

And yet enough time has now passed that apparently these historical lessons have been forgotten.

There's no doubt that trade wars can seem tempting to politicians. It's far easier to get your electorate wound up about jobs that have been lost to other countries than to identify those that you have (or have not) created at home. And perennial bugbears like China make easy scapegoats, especially in an election year.

But one thing the history of trade wars teaches us is that when things get heated between two countries, it's not long before others get pulled in — an even more likely scenario in today's era of unprecedented economic integration and interdependency.

In the Gershwins' musical, just as war between the U.S. and Switzerland has ended and a peaceful League of Cheese established, an ultimatum arrives from Russia objecting to U.S. tariffs on caviar. And, it's implied, it all happens again.

Dr. Marc-William Palen is a history lecturer at the University of Exeter and the co-director of the History and Policy Global Economics and History Forum in London. His latest book is "The 'Conspiracy' of Free Trade: The Anglo-American Struggle over Empire and Economic Globalisation, 1846-1896." You can follow him on Twitter at @MWPalen.

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