I have a suggestion for everyone who writes about international trade: it is time to bury, once and for all, the concept of a “trade war.” The phrase is so ubiquitous that it will be awfully hard to abolish; I have probably been guilty myself from time to time. Indeed, it is almost a reflex that every time the United States or some other nation takes any action that restricts imports in any fashion, reporters and editorial writers jump to their keyboards to warn that a trade war is looming. But it is a canard that makes it far harder to have a sensible discussion about U.S. trade policy.
No sooner had President Obama and Mitt Romney finished their latest round of “who’s tougher on trade with China?” in their final debate Monday night than the New York Times – to take one of many possible examples – warned that “formally citing Beijing as a currency manipulator may backfire, economic and foreign-policy experts have said. In the worst case, it could set off a trade war, leading to falling American exports to China and more expensive Chinese imports.”
But what exactly is a “trade war”? To take the U.S.-China example, the notion seems to be that, if the United States restricts Chinese imports, China will respond by restricting imports of U.S. goods, in turn leading to further U.S. restrictions and so on and so on until trade between the two countries plummets.
The closest historical example is the reaction to the infamous Smoot-Hawley tariff act of 1930, which raised the average U.S. tariff on imports to historically high levels. As trade historian Douglas Irwin of Dartmouth has shown persuasively, Smoot-Hawley did not cause the Great Depression, and probably did not even exacerbate it very much since trade was a tiny part of the U.S. economy. But Smoot-Hawley did result in Great Britain, Canada and other U.S. trading partners raising their own tariffs in response. Irwin suggests that the higher tariffs were probably responsible for about a third of the 40 percent drop in imports between 1929 and 1932, and perhaps a slightly higher percentage of export losses. And the new trade barriers put in place took many decades to dismantle.
With imports and exports today comprising roughly a third of the U.S. economy, and the few remaining tariffs mostly in the single digits, the consequences of similar tit-for-tat tariff increases today would be far more severe. But what are the chances of such a “trade war” actually occurring? Pretty close to zero, for two big reasons.
First, in 1930, there was no World Trade Organization, no North American Free Trade Agreement, no European Community/Union – in short, no rules to prevent countries from jacking up tariffs or imposing quotas whenever governments felt domestic political pressure to do so. Today, such unilateral action is largely forbidden. Indeed, the tit-for-tat measures we have seen in the U.S.-China trade relationship have all been taken within the framework of WTO rules. When the Obama administration curbed purchases of Chinese steel in 2009 under the “Buy America” provisions of the stimulus, for example, China responded with an “anti-dumping” case which led to tariffs on imports of U.S. steel. But the United States challenged that action in the WTO, and just last week the WTO ordered China to lift the duties. No trade war – instead the phrase “see you in court” comes to mind.
Secondly, almost every nation in the world seems fully aware of the dangers of aggressive protectionism. One of the striking things about the Great Recession– which resulted in global trade volumes plunging by more than 12 percent in 2009, the biggest drop since World War II – is how little of the protectionism that is permitted under WTO rules actually occurred. Chad Bown of the World Bank has documented the surprising low level of new trade barriers imposed during the recession and its aftermath.
The danger of competitive currency devaluations – which are not clearly covered under WTO rules – is a greater threat than tariffs. This is one of the reasons that Romney’s pledge to label China a currency manipulator could be playing with fire, particularly after more than seven years in which the value of the renminbi has been creeping up steadily against the dollar. And his suggestion that the United States would impose tariffs in response is just silly – it would be a blatant violation of WTO rules and would quickly be slapped down as such. Again, however, no trade war – just an unfavorable WTO decision with which a Romney administration would quickly comply.
The real questions about trade restrictions should be practical ones – are the gains to the economy worth the costs? Generally, the answer is no, because free competition is a good thing for consumers and competitive businesses. But sometimes protecting a viable domestic industry temporarily against a flood of low-priced imports makes sense, which is why the WTO has rules permitting temporary safeguards. Sometimes foreign subsidies make fair competition impossible, which is why the WTO permits tariffs against dumped or subsidized imports. Such actions raise prices for U.S. consumers, but may still on balance bring benefits to the U.S. economy.
The “trade war” threat stifles reasonable debate, because every trade action – however modest -- is assumed to cause a self-destructive over-reaction by trading partners. So I hereby pledge to abolish the phrase from all my future writings on the subject. I hope others will do the same.