BY: FEDERICA RUSSO
For weeks, the news cycle has been gripped by the United States’ declaration to increase duties on foreign imports, essentially starting what many policy and financial analysts are referring to as a “trade war”. The decision was made by the American Government in an effort to protect national production but soon set off negative repercussions on the international stage with other countries reacting to limit losses, a result of the increase in costs in the market.
What is more alarming is that the strategy has not produced the effects that the U.S. was hoping for. The consequences have been disastrous within the national economy, and the United States is beginning to face the repercussions of their actions. In response to the tariffs, countries have begun limiting import quantities, choosing different commercial partners and increasing the prices of other products.
The narrative outlined above relates to the aftermath of the approval of the Smoot-Hawley Tariff Act of 1930. But it could very well relate to the current situation with China as the American government remains a staunch advocate of their protectionist policy. The economist Charles Kindleberger highlighted the widespread resentment in the aftermath of the Smoot-Hawley Act. Italy stood up against duties on hats, Canada objected to the sugar and butter price increases, France imposed quota restrictions, and the UK chose to trade with its ex-colonies.
88 years later, President Donald Trump has adopted the same political and economic tactic. But many are ignoring the similarities between the two events. It is important to examine what the consequences will be this time.
The media has remained focused on the international trade relevance, and public opinion, wondering how a possible decline in trade volume can affect their lives, and most of all, the possibility of a global trade war.
When Trump signed the acts to impose effective duties on the steel and aluminium imports, even without the whole Party’s consent, he touted his priority as the protection of national firms. However, American industries have been the first to feel the crippling effects of the tariffs. The metals’ producers are concerned about the total amount of the product imported from foreign countries, in particular from China. Data indicates that the US imported $30 billion of steel in 2017: $823 million from the Asian Giant, and more than $1 billion from Germany. It is important to note that in China, there is an over-capacity in the steel and aluminium sectors linked to the excess supply in the face of waning demand. The Chinese Government is not able to easily manage it, but the country exports only 2% of its total production to the United States. Despite these negligible numbers, the Trump administration has continually accused the Chinese of dumping steel.
The situation became more convoluted when the American Government accused China of stealing tech secrets protected by intellectual property. All the charges were rejected by Beijing, but Washington published a list of 1300 Chinese products that will be taxed in the high-tech and telecommunication sectors.
China has not remained idle in the face of these events, retaliating with the application of duties on 128 American products. China’s actions have the potential to damage many US companies that operate in the wine, fruits, and meat sectors.
The moves made on the American trade-chessboard are not necessarily made with the sole purpose of protecting national self-sufficiency. It is possible that Trump could be aiming to block the rise of China. The People’s Republic of China, under the leadership of Xi Jinping, is gaining powerful influence in the international arena, influence that previously belonged to the United States. Trump’s actions indicate that he is trying to exercise a “right of ownership” on that role.
However, when we talk about free trade and the policies adopted by governments all over the world, experts have opposing views. In general, it is held that protectionist policies positively contribute to the economic growth, but in the current situation it might not be the case.
An import duty is a tax on imported goods and particularly aims at curbing the free movement of goods. The state generally imposes the duty to benefit national enterprises, but at the same time, it indirectly harms consumers because prices for necessary items are driven up. Despite initial positive effects, import duties can result in the disruption of the economic well-being of other countries engaged in trade while not creating any new prosperity “at home”. The terms of trade are what change at the expense of the exporting producers. The real trade war can start when the exporters implement measures to react to the duty and to offset the imbalance.
In today’s day and age, where government tactics are often insidious, the effects of tariff barriers can cripple the global economy. The threat is amplified when responsiveness to these events, which occur quickly and are spreading cross-systems, is slow and lacking. We are living in a connected environment, in a globalized world and the removal of the barriers to trade is a precondition for the success of globalization.
The phenomenon of globalization has been criticized by the West. The countries of the “Group of 7” (USA, Italy, France, Germany, UK, Japan, Canada) have suffered the effects of the convergence in their recent economic history. Thanks to the revolution brought about by information and communication technologies, which characterized the fourth phase of the globalization, it has been possible to transfer the know-how into the emerging markets. They have presented themselves with a revisited face by occupying not only the role of “manufacturing hubs”, but they also present themselves as a perfect mix of low wages and high tech to attract foreign investments.
On the other hand, since 1990, the G7’s GDP has declined leading to the de-industrialization process, job losses, and overall frustration. The general dissatisfaction has allowed many Western parties to gain support by the introduction of populist policies based on the idea that combating the globalization is right and possible. The result is a picture where:
- China, a communist country closed to the world for years, is defending globalization, mutual cooperation, and the free movement of goods and people;
- The United States, a democratic and liberal country, is adopting protectionist measures and thinking of erecting barriers, not only commercial ones, but ones that effect the movement of people along with goods.
The truth is that globalization has winners and losers everywhere because of the high level of competitiveness that requires its actors to have the ability to survive when the number and the skills of the players increase. Moving the Queen, the Tower, or the Horse on the board is possible but it is like a flooding river, whose levees will be pulled by the current of globalization.
Federica Russo is an Italian student of Business Administration with a focus on Organization Design, Statistics, Corporate Management, and International Economy. With five years of experience in writing articles on world affairs, she is a contributor for the Asian section of “Il Caffè Geopolitico” where she covers articles on Chinese issues. At the moment she is working on her final dissertation analyzing the impact of the BOD composition in the multinational Oil Companies.
Please note that opinions expressed in this article are solely those of our contributors, not of Political Insights, which takes no institutional positions.