Trump vs The WORLD

Author: Resuf Ahmed

With this tweet on March 2, 2018, U.S. President Donald Trump announces a trade war with China.

Source: Twitter @realDonaldTrump

A brief history of Trade War

A trade war refers to two or more states raising or creating tariffs or other trade barriers on each other in retaliation for other trade barriers.[1]

The first full-fledged trade war happened between the Irish Free State and the United Kingdom between 1932 to 1938.[2] The whole retaliation began with the Irish Free State refusal to reimburse the land annuities granted to Irish tenant by Britain under the Irish land Acts.[3] 

This resulted in the imposition of unilateral trade restrictions by both countries, causing severe damage to the Irish economy. British Prime Minister Ramsay Macdonald retaliated with nonpayment of annuities imposed a 20% import duty on Irish Free State products which were being exported to Britain, it was 90% of all Free Irish State export. This led to the complete imbalance of Free State Economy and political atmosphere. 

The war ended with Anglo-Irish Trade agreement which was signed on 25 April 1938 between Ireland and the United Kingdom. The treaty stated that the 20% tariffs that both the United Kingdom and Ireland placed on their respective imported goods were to be abolished. Ireland was also to pay a final one time £10 million sums to the United Kingdom for the "land annuities" derived from financial loans originally granted to Irish tenant farmers by the British government.[4]

Smoot-Hawley Tariff Act

As the global economy entered the first stages of the Great Depression in late 1929, the US's main goal emerged to protect American jobs and farmers from foreign competition.[5]

Smoot–Hawley Tariff commonly known as the Tariff Act of 1930 was a protectionist trade policy signed into law on June 17, 1930, in the United States.[6] The act raised the U.S tariff on more than 20,000 imported goods.[7]

We can see in the figure that, the "dutiable tariff rate" peak of 1932 was 59.1%. The average tariff rate on dutiable imports increased from 40.1% in 1929 to 59.1% in 1932 (+19%).

When the Act came into effect the retaliation began by other countries. In May 1930, Canada, the country's most loyal trading partner, retaliated by imposing new tariffs on 16 products that accounted altogether for around 30% of US exports to Canada. France and Britain protested and developed new trade partners. Germany developed a system of autarky.[8]

The effect on Us economy was humongous, US imports decreased 66% from $4.4 billion (1929) to $1.5 billion (1933), and exports decreased 61% from $5.4 billion to $2.1 billion. GNP fell from $103.1 billion in 1929 to $75.8 billion in 1931 and bottomed out at $55.6 billion in 1933.[9] 

Imports from Europe decreased from a 1929 high of $1.3 billion to just $390 million during 1932, while US exports to Europe decreased from $2.3 billion in 1929 to $784 million in 1932. Overall, world trade decreased by some 66% between 1929 and 1934.[10]

The consensus view among economists and economic historians is that the passage of the Smoot–Hawley Tariff exacerbated the Great Depression, although there is disagreement as to how much.[11]

Franklin D. Roosevelt spoke against the act while campaigning for president during 1932.[12]

World Trade Organization was formed to regulate international trade, in the hopes that nothing like the global trade war of the 1930s would ever happen again.

The Current War between U.S and China

Source: Google Images

China ran a $375bn goods trade surplus with the US in 2017. Trump has demanded that China cut the trade gap by $100bn. Beijing said it has made a “request for consultations” at the World Trade Organization (WTO) in response to the US tariffs, triggering that body’s dispute settlement mechanism.[13]

We are living in the era of social media, where the world economy trembles around a Facebook post and tweets. Tweets by Donald Trump is more influencing than so many other important economic indicators. Trump announced the trade war on Twitter and says that it’s not a trade war, the white house says “the action is a response to the unfair trade practices of China over the year, by all means, it is a TRADE WAR.

Source: Twitter  @realDonaldTrump

On April 3rd America published a list of some 1,300 Chinese products it proposes to hit with tariffs of 25%. Just a day later China produced its own list, covering 106 categories. “As the Chinese saying goes, it is only polite to reciprocate,” said the Chinese embassy in Washington, DC. The list China published on April 4th is even bolder. It makes no effort to comply with World Trade Organisation rules and aims at pressure points in America’s democracy, including industries with powerful lobbies, such as aircraft and soybeans, as well as products from politically sensitive states.

According to the Peterson Institute for International Economics, a think-tank, America’s list covers Chinese products worth $46bn in 2017 (9% of that year’s total goods exports to America; see graphic). China’s covers American goods worth around $50bn in 2017 (38% of exports).[14]

China is the biggest market for US soybean. The American Soybean Association, a lobbying group representing 21,000 producers, warned that China’s proposed 25% tariff on soybeans would be “devastating” to American farmers. It estimated that farmers lost an estimated $1.72bn on Wednesday morning alone as soybean futures tumbled.[15]

 A possibility of A Global Trade War

The war might soon to be turned into a global affair due to the fact that on March 1, 2018, Trump announced his intention to enforce a 25 percent tariff on steel and a 10 percent tariff on aluminum imports. According to the department's International Trade Administration and IHS Global Trade, Canadian and Brazilian steel comprised 16 percent and 13 percent of U.S. steel imports as of September 2017. China, frequently criticized politically for dumping cheap steel on trade partners, is not one of the top 10 importers of steel to the U.S.[16] 

The Dow Jones Industrial Average tumbled more than 500 points, or 2%, after the initial announcement. Large steel consumers, like U.S. car manufacturers, Ford and General Motors saw even larger drops in share price.[17]

Canadian Trade Minister, Francois-Phillippe Champagne, said the tariffs would be "unacceptable".[18] Jean-Claude Juncker, the president of the European Commission, stated such an action by the U.S. would face a legal challenge at the World Trade Organization.[19]

According to Tõnu Mertsina, chief economist at Swedbank, a trade war between the U.S. and China would have a bad impact on Estonia with its small and open economy.[20]

The World is Watching...

Nothing is final yet, The tariffs will not take effect immediately. The US government is inviting public comment on its trade sanctions through 11 May and will hold a hearing on the plan on 15 May. China set no date for its 25% duties to take effect, saying it was waiting to see what Trump did.[21] So we just have to sit and wait and see how things unfold. Will it adversely affect the U.S as the 2002 Bush tariff on Steel did?[22] Or will it lead to the fulfillment of Trump’s demand of cutting the trade surplus between China and US to $100 Billion?

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[1] "What is trade war? definition and meaning". BusinessDictionary.com

[2] Time (Magazine) – IRISH FREE STATE: Economic Civil War. Monday, Jul. 25, 1932 Archived 13 August 2013 at the Wayback Machine.

[3] 1925 Agreement terms

[4] Irish Treaty Series, No. 1 of 1938, "Agreements between the Government of Ireland and the Government of the United Kingdom, London, 25 April 1938.

[5] Merill, Milton (1990), Reed Smoot: Apostle in Politics, Logan, UT: Utah State Press, p. 340, ISBN 0-87421-127-1.

[6] ch. 497, 46 Stat. 590, June 17, 1930, see 19 U.S.C. § 1654

[7] Taussig (1931)

[8] Brown, Wilson B. & Hogendorn, Jan S. (2000), International Economics: In the Age of Globalization, Toronto: University of Toronto Press, p. 246, ISBN 1-55111-261-2.

[9] Burewau of the Census, Historical Statistics series F-1

[10] "Smoot–Hawley Tariff", U.S. Department of State, June 21, 2003, ISBN 0-8240-5367-2.

[11] Whaples, Robert (March 1995). "Where Is There Consensus Among American Economic Historians? The Results of a Survey on Forty Propositions" (PDF). The Journal of Economic History. Cambridge University Press. 55 (1): 144. doi:10.1017/S0022050700040602. JSTOR 2123771 – via JSTOR.

[12] "The Battle of Smoot–Hawley", The Economist, December 18, 2008.

[13] https://www.theguardian.com/business/2018/apr/04/trump-china-trade-war-concerns-import-taxes-stock-market

[14] https://www.economist.com/news/finance-and-economics/21739975-two-countries-threaten-descend-sequence-tit-tat-retaliations

[15] https://www.theguardian.com/business/2018/apr/04/trump-china-trade-war-concerns-import-taxes-stock-market

[16] https://www.cnbc.com/2018/03/01/canada-brazil--but-not-china--will-be-hit-hardest-by-trumps-steel-tariffs.html

[17] Schlesinger, Jacob M.; Nicholas, Peter; Radnofsky, Louise (2018-03-02). "Trump to Impose Steep Aluminum and Steel Tariffs". Wall Street Journal. ISSN 0099-9660. Retrieved 2018-03-03.

[18] "Trump Expected to Announce Stiff Steel, Aluminum Tariffs". Bloomberg.com. 2018-03-01. Retrieved 2018-03-02.

[19] "European Commission responds to the US restrictions on steel and aluminium affecting the EU"(Press release). European Commission. March 1, 2018.

[20] https://news.err.ee/744482/swedbank-us-chinese-trade-war-would-negatively-impact-estonia

[21] https://www.theguardian.com/business/2018/apr/04/trump-china-trade-war-concerns-import-taxes-stock-market

[22] Read, Robert (2005-08-01). "The Political Economy of Trade Protection: The Determinants and Welfare Impact of the 2002 US Emergency Steel Safeguard Measures". World Economy. 28 (8): 1119–1137. doi:10.1111/j.1467-9701.2005.00722.x. ISSN 1467-9701.