More than just tariffs: The complex legacy of trade wars

The global marketplace is currently reacting to President Trump's implementation of aggressive tariff policies. While the administration argues these tariffs are designed to bolster the US economy and safeguard American jobs, the move has ignited widespread fears of retaliatory measures from other nations, potentially leading to a full-blown trade war.

This isn't a new story. History is full of these trade tussles and the economic disruption they caused. Economists usually roll their eyes at tariffs, saying they're not great ways for governments to make money. They point out that these trade wars often hurt everyone, especially consumers who end up paying more for stuff.

On the other hand, proponents maintain that tariffs can shield domestic industries from foreign competition.

US-China Trade War (2018)

The US-China trade dispute of 2018 provides a compelling illustration. On March 1, 2018, President Trump announced his intent to impose a 25% tariff on steel and a 10% tariff on aluminium imports. The following day, he asserted via social media that "trade wars are good and easy to win."

On March 8, he signed an order to implement these tariffs within fifteen days. According to Morgan Stanley, the tariffs initially affected roughly 4.1% of US imports, but they were extended in June 2018 to include the European Union, Canada, and Mexico. Escalating tariffs on Chinese goods triggered a retaliatory response from China. By late 2019, the US had imposed tariffs on Chinese imports worth approximately $350 billion, while China retaliated with tariffs on US exports worth roughly $100 billion.

Impact

The impact was considerable. US imports from China declined, remaining below pre-trade war levels by late 2022. China's exports to the US also decreased in targeted sectors.

Research from the National Bureau of Economic Research (NBER) suggested that the trade war reduced real income in the US by $1.4 billion per month in 2018-2019, due to increased domestic prices and reduced foreign competition. Studies indicated that US consumers bore the brunt of the tariffs through higher prices, and the profitability of Chinese exporting firms was negatively affected.

The trade war also created significant stock market volatility and increased uncertainty in global markets. The International Monetary Fund noted the negative impact on global economic growth. Ultimately, the costs were largely borne by consumers and businesses in both the US and China, with broader negative consequences for the global economy.

The Banana Wars (1990s to 2012)

The infamous "Banana Wars," a prolonged trade dispute between the European Union (EU) and the United States, with Latin American countries also involved, spanned from the early 1990s to 2012.

The problem? The EU preferred buying bananas from its old colonies in Africa, the Caribbean, and the Pacific (collectively known as ACP countries) more than from other places.

Bananas from Latin American countries, often produced by US companies like Chiquita and Dole, faced higher tariffs and stricter quotas, rendering them more expensive in the EU market.

Impact

The impact of the Banana Wars was significant, straining US-EU trade relations for nearly two decades. It also served as a major test for the World Trade Organization's (WTO) dispute settlement system. While the EU's preferential treatment benefited banana producers in ACP countries, it hit Latin American producers and US companies operating there hard.

The Banana Wars became a notable case study in international trade law and dispute resolution, illustrating the potential for lengthy and complex trade conflicts, even over seemingly minor products.

The Steel War (2002)

In 2002, the US, under President George W. Bush, initiated a "steel war" with Europe and other nations by imposing tariffs on imported steel. This action aimed to protect the struggling American steel industry from a surge of imports. The US announced tariffs ranging from 8% to 30% on various imported steel products, intended to last three years.

The justification was that the import surge was harming the domestic steel industry, leading to bankruptcies and job losses. The EU threatened retaliation with tariffs on a range of American goods and challenged the legality of the US tariffs at the WTO.

Impact

The impact of the US tariffs was that while steel imports from targeted countries decreased, imports from exempted nations increased, suggesting a diversion of trade rather than a significant overall reduction. Many US industries reliant on imported steel faced higher costs, and studies suggested that more jobs were lost in steel-consuming industries than were saved in the steel production sector.

The US-Japan Auto Tariffs (1987)

In April 1987, President Ronald Reagan's administration imposed 100% tariffs on approximately $300 million worth of Japanese imports. While the automotive sector was not the primary target, the action had implications for the broader trade relationship, including concerns surrounding auto trade.

The core reason was Japan's alleged failure to adhere to a semiconductor trade agreement signed in 1986. The targeted goods were selected to exert pressure on Japan while minimising direct harm to US consumers and industries.

Impact

The impact was multifaceted: the primary goal was to pressure Japan to enforce the semiconductor agreement, and the tariffs served as a penalty for perceived non-compliance. While they exacerbated trade tensions, they also contributed to progress in the semiconductor dispute. Some analysts suggest that the broader pressure contributed to the appreciation of the Japanese Yen.

The Smoot-Hawley Tariffs (1930)

The Smoot-Hawley Tariff Act of 1930, signed into law by President Herbert Hoover, significantly raised import duties on over 20,000 goods. It is widely regarded as a policy blunder that exacerbated the Great Depression.

The initial aim was to protect American farmers, but lobbying efforts led to tariffs on a wide range of manufactured goods.

Impact

The Act raised tariff rates by an average of 20%. The most damaging consequence was swift retaliation from other countries, leading to a dramatic decrease in international trade. Global trade plummeted by approximately 66% between 1929 and 1934. US exports and imports fell drastically, and the tariffs hindered the ability of American farmers and manufacturers to sell goods abroad. The Smoot-Hawley Tariffs stand as a significant historical event, remembered as a critical policy error that deepened the Great Depression.

Examining these historical trade conflicts, from the Smoot-Hawley tariffs to the US-China and Banana Wars, reveals the complex and often detrimental consequences of protectionist measures. While intended to shield domestic industries, tariffs frequently trigger retaliation, disrupt global commerce, and ultimately burden consumers.

The 2018 US-China trade dispute exemplifies these negative impacts, underscoring the delicate balance between national economic interests and the interconnected nature of the global marketplace.