Who Wins and Loses in a Trade War?

In less than two years, the Trump administration has imposed billions in tariffs on U.S. trading partners, including Canada, Mexico, China and the European Union. All have retaliated with tariffs on U.S. goods. Hiroshi Watanabe/Getty Images

On July 10, 2018 the Trump administration hit China with 10 percent tariffs on $200 billion worth of imports, a penalty that is likely to affect the prices that U.S. consumers pay for scores of products, ranging from computers to luggage.

Chinese officials quickly responded, saying they were contemplating various measures to retaliate against the U.S., including stepping up border inspections of U.S. goods, and holding up licenses for U.S. companies to do business in China.

It was the latest skirmish in a trade war that's been rapidly escalating since early this year — a war in which Trump has attacked what he views as unfair Chinese trade practices and demanded that the country buy more American products to reduce the U.S.-China trade deficit, which totaled $376 billion last year. As Trump has hit China with tariffs on tens of billions of dollars in goods, the Chinese have responded by hitting back with comparable levies of their own against U.S. products.

In addition, Trump is waging trade wars on other fronts. In May, according to The Hill, Trump imposed steel and aluminum tariffs on Canada, Mexico and the European Union. The U.S.'s neighbor to the north immediately counterpunched, with Canadian Prime Minister Justin Trudeau announcing that it would slap retaliatory tariffs on U.S. exports to Canada.

It's hardly the first time that the U.S. and other nations have become involved in such a conflict over trade. Trade wars can happen for various reasons. It could be that one nation decides that it's getting a raw deal because another nation provides subsidies to its manufacturers, so that they can export goods that are priced too low to compete with. Or it could be that a nation decides it wants to nurture its own industries by hindering their foreign competitors with protective tariffs.

The Opium Wars

Centuries ago, trade wars often involved actual violence. In the 1700s and early 1800s, for example, China sold a lot of tea and porcelain to the British Empire, so much that the British got concerned about the outflow of silver to pay for it. They decided to fix the trade imbalance by getting China to import large quantities of opium that the British produced in India. When the Chinese government eventually balked at this arrangement, the British sent in their warships, and forced the Chinese to sign an 1842 treaty that not only opened up China to British trade, but gave the territory of Hong Kong to the British. This conflict became known as the First Opium War.

But even a bloodless trade war can cause plenty of suffering. A lot of observers are seeing unsettling parallels between Trump's multi-front trade warfare and the trade war that erupted in the 1930s after President Herbert Hoover signed into law the Smoot-Hawley act, which raised U.S. tariffs by an average of 16 percent. Other countries enacted their own tariffs in response, leading to a disastrous global decline in trade.

"Initially, Smoot-Hawley was not a response to the Great Depression," Dartmouth College economics professor Douglas A. Irwin, author of the 2011 book "Peddling Protectionism: Smoot-Hawley and the Great Depression," explains in an email. "It was passed by the House in the spring of 1929, before the business cycle peak at a time when the economy was doing well and the unemployment rate was low.

"However, it got held up in the Senate and by that time the stock market had crashed in the fall of 1929 and the economy moving into a recession, which later became the Depression. The economy continued to get worse after the passage of Smoot-Hawley, and the retaliation against U.S. exports that occurred because of it is thought to have contributed to the severe economic difficulties at the time. So there is a cautionary tale here: Just because the economy is doing well and close to a peak does not mean that things cannot go badly if one moves in a protectionist direction."

Smoot-Hawley also helped stimulate a surge of angry nationalism in other countries. "If one country slaps tariffs on your goods, the usual response is to take offense and retaliate rather than to turn the other cheek," Irwin explained. "Both in 1930 and today, Canada was very upset with the U.S. tariff action and retaliated. Nationalists gain strength on perceived slights. And just think about how China still remembers being humiliated by Western powers during the Opium Wars of the 19th century, and its vow never to be so weak again. When the Trump administration bullies countries today on trade, it naturally leads other countries to stiffen their resolve to resist the U.S. "

Who Takes the Hit?

Another big problem with trade wars is that there's a lot of collateral damage. As Philip I. Levy, a senior fellow on the global economy for the Chicago Council on Global Affairs, recently pointed out, poor people tend to suffer disproportionally, since basic necessities that they already struggle to afford — food, shoes, clothing — can become more expensive.

Additionally, as Levy writes in an email, certain sectors of the economy can be hit worse than others. "If you are in a steel-using sector (e.g. an auto parts manufacturer) you are more likely to be hurt by the Sec. 232 steel tariffs." He also noted, "If you are in the construction sector, you are likely hurt by tariffs on steel and on Canadian softwood lumber. These are hits to income and employment, which are in addition to the hits people take as consumers."

The producers of the products that a government is waging war over — and their investors — stand to benefit. "To be fair, if you are a shareholder in U.S. Steel, you're pretty happy you don't have to face as much competition," Levy continued. "True for workers, as well, but much of the job loss has been to automation, not trade, so the tariffs don't fix that."

Though the world economy and global trade are stronger today than they were in the early 1930s, Levy argues that a trade war today might be even more damaging. "There's this unusual argument about why this is a great time for a trade war," he said. "It's a little like saying that today is a good day for me to slam my hand in the car door, since I don't have to give a piano performance in the near future. While that may be true, it's still not a good idea to slam my hand in a car door.

"Why might now be worse than the 1930s for the United States? Back then, everyone was doing it, and we didn't really have global supply chains. Now, it is not the case that all countries are raising trade barriers against everyone else. It is the United States that is carving itself out of global supply chains." Additionally, he notes, the rest of the world is still striking trade deals, whether it's the European Union and Canada, EU-Japan, or the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. In Levy's opinion, Trump's trade war "will uniquely disadvantage U.S. business."