Everyone Loses From the Current Rise in Protectionism

A port in Lianyungang in China’s eastern Jiangsu Province. Photo Credit: Getty Images.

One of the most significant features of the Trump presidency is the global rise of economic nationalism. Once deeply embedded beliefs in the virtues of international trade and free trade agreements are now shattered, as more and more countries resort to protectionism, engaging in trade wars and retaliatory tariff increases. Such zero-sum logic is alarming and dangerous, however. Everyone loses in the current trade wars, and as the economic uncertainty increases, another recession looms closer and magnifies in scope. Instead of weaponizing trade, countries should further open up, eliminate existing barriers, and use international trade organizations to solve disputes and renegotiate global rules of trade.

Until several years ago, Washington championed free trade and acted as the most important free market-oriented international actor. What began as an effort to abandon restrictive policies that divided the world after the Great Depression culminated in a massive success. The result was a strong trading system, backed up by an establishment of multiple trading organizations and myriad trade-promoting agreements. The world became connected economically as never before, and global wealth grew at unprecedented rates. In 1945, more than 55% of people lived in extreme poverty – the current rate is around 9%.^[i] Moreover, for the first time in world history, majority of people today live in households that are considered to be middle class or wealthier.^[ii] These staggering results are possible because of the adoption of free trade and elimination of mercantilist and zero-sum thinking.

But the outlook into the future is gloomy. Washington no longer champions free trade; instead, the Trump administration is on a mission to vitiate it. Over the past few years, the administration has embraced trade war statecraft as the principal strategy for confronting China, and it has also targeted its close partner — the European Union — with multiple rounds of tariffs. The patterns are clear: The administration sees trade through a zero-sum lens, weaponizing tariffs and using brinksmanship-like economic coercion to advance national interests. Bilateral economic deals are now the preferred American way of doing business just as the importance of international trade rules and trading organizations has rapidly diminished.

In reality, none of these policies serve American national interests. Consider the trade war with China, which has produced negative economic effects both for Beijing and for Washington. While the trade war has slowed down Chinese growth,^[iii] the U.S. loses in the long term. Numbers show that the tariffs have hit American consumers harder than their Chinese counterparts and that America — due to its profound interconnectedness with the international economic system and the nature of its import-oriented economy — is more susceptible to the economic damage produced by tariffs than China.^[iv] The trade war has also failed to decrease the US trade deficit, which the President seeks to reduce.^[v] Indeed, the trade war has had the opposite effect: The trade gap between the two countries rose by nearly 12% in 2018 and another 8% in the first eight months of 2019.^[vi] Overall, the US trade deficit increased by 5.4%, to nearly $500 billion, compared to the same period last year.^[vii] President Trump is therefore wrong in claiming that “trade wars are good, and easy to win.”^[viii] Rather, they are impossible to win; they hurt everyone involved and Washington in particular.

Moreover, the trade war has had an immense worldwide impact, hurting the global economy. For instance, due to the global nature of manufacturing and China’s key role in production, tariffs have negatively impacted global supply chains, put financial pressure on companies around the world, and undermined growth. These developments hinder innovation. In particular, tariffs have negatively affected manufacturing powerhouses such as Japan, South Korea, and Germany — states that drive regional economic production.^[ix] When these powerhouses grapple with an economic slowdown and decreased trade activity, so too will the surrounding states that depend on them. This result would be a global economic downturn and financial upheaval. Germany, the most important economic power in the eurozone, is in especially deep trouble. As an export-oriented economy, it is highly exposed to tariffs. It is also experiencing an economic slowdown for structural reasons, leading its economy to shrink 0.1% from April through June. Alarmingly, its economic performance was the worst of any eurozone country during the second quarter.^[x]

The trade war has also decreased confidence in businesses and has exacerbated global economic uncertainty. This makes it hard for companies to invest in and to secure crucial business deals. As the trade war with Beijing is highly unpredictable, and it is possible that it will continue beyond Trump presidency, companies with a global footprint need to operate carefully without taking unnecessary risks, which would make them unable to navigate the chaotic policies and plan for the future.

These issues are a textbook recipe for a steady and acute economic downturn of the global economy. Earlier this year, the International Monetary Fund estimated that the US trade war with China could cost the global economy around $700 billion by 2020, which amounts to 0.8% of the global gross domestic product.^[xi] This would exacerbate the already growing fear of the next recession, which will define the character of the several next decades. Today’s world is still grappling with the repercussions of the last recession, which has contributed to the growth of dangerous populism across the world, high unemployment, and increased debt levels.^[xii] As many argue, the recession of 2008 was so cataclysmic that the world will never return to the “old normal.”^[xiii] Current policymakers should therefore do everything possible to mitigate and delay the next incoming recession, and should, under no circumstances, engage in perilous trade wars.

Instead of engaging in protectionism, policymakers should pursue additional free market reforms and use international trade organizations to resolve disputes. If the Trump administration wants to continue with tariffs and seeks to confront China financially, it should only do so in sectors that are not going to undermine national security and will not have a lasting global impact. Washington should also continue to hold regular trade discussions, as only those will spur mutual understanding and yield feasible results for both sides. While free market reform is undeniably imperfect, it is the best option for sustaining economic growth, which is a condition crucial for global stability.