Trade wars are inherently destructive. They interfere with voluntary exchange, one of the fundamental forms of human cooperation. Both parties lose trade wars.
The United States imposed tariffs on steel and aluminum in June against its trading partners. Nearly all partners are members of the World Trade Organization (WTO). They complained that U.S. tariffs violated its agreement to not raise tariffs against members. These partners also imposed retaliatory tariffs against U.S. exports. The U.S. tariffs and the retaliation were the first round or battle in a possible trade war.
There is no precise definition of a trade war, but disputes involving more countries, more products, higher tariff rates and longer duration are more warlike. Current trade disputes involving the U.S. are looking increasingly warlike. Since the implementation of the steel and aluminum tariffs, the U.S. has imposed some tariffs against China, and threatened to impose a series of additional tariffs against Chinese goods. The U.S. has also threatened to impose tariffs against automobile imports from Europe.
Why is the Trump administration imposing tariffs against fellow members of the WTO, partners in NAFTA, and NATO allies? Soon after taking office, the President ended U.S. participation in both Pacific and European trade negotiations. The President is critical of multilateral relationships in general, and he claims that current trade arrangements are the result of earlier “bad deals” for the U.S.
Multilateral negotiations are an orderly way to resolve disputes that one country considers a “bad deal.” For example, the U.S. has accused China of “stealing” technology from American businesses, and many other WTO members have complained about Chinese policies toward intellectual property.
Instead of taking unilateral action, the U.S. could have organized other members and taken the complaint to the WTO. If the U.S. considers EU tariffs on automobiles to be too high, U.S.-EU negotiations would be an ideal way to agree on better tariff rates. A recent unofficial German proposal is for both partners to accept zero tariffs on automobiles.
It appears that the Trump administration prefers bilateral to multilateral negotiations because it thinks the large size of the U.S. economy would allow it to bully smaller countries to accept trade deals more favorable to the U.S. One problem with this bullying tactic is that when the U.S. acts unilaterally to impose penalties against all other countries, it encourages those victims to collude and retaliate against the U.S. That is exactly what they have done, and collectively they are much bigger than the U.S. Many American businesses and their workers have already been harmed by restrictions on U.S. exports.
An immediate loss to Americans from higher tariffs is higher prices for imports and their domestic substitutes. A tariff is a tax, and the new higher tariffs erase at least part of the favorable effects of the earlier reduction in corporate and individual taxes. Commerce Secretary Wilbur Ross has claimed that prices will rise by negligible amounts, but an extra $5,000 per year for a car is not negligible for many Americans.
American businesses that use steel and aluminum are major victims of the tariffs, and business users, whose costs are increased, employ many more workers than steel producers. U.S. auto producers are steel users, and they oppose the tariffs. Beer producers use aluminum cans, and they oppose the tariffs. For each job gained by steel and aluminum employees, more jobs would be lost by workers employed by users of steel.
The Trump administration has said that tariffs are a negotiating technique that need not be implemented. Now that tariffs are in place, they say other countries will soon back down. However, trading partners have not backed down, and, in fact, retaliatory tariffs against U.S. exports are already in place. Foreign officials have expressed confusion about exactly what concessions the US government wants. Currently, no formal negotiations are taking place. Higher future tariffs are being announced regularly. There are no signs of an end to this tariff war. When will both sides recognize that interfering with voluntary trade is harmful to both parties? Trade wars are lose-lose propositions.