Trade Wars Have No Winners
The last 60 years we have seen a significant move towards trade liberalization both in merchandise goods as well as services. With the General Agreement on Tariffs and Trade immediately after the Second World War, countries indicated their willingness to work together in order to remove barriers to trade and enhance global efficiencies that will generate benefits for all.
This was further reinforced with the founding of World Trade Organization in 1995, an organization that would further facilitate free trade but also act as dispute settlement arbitrator. A number of free trade agreements have also been signed over the same period of time with the European Union moving forward with the creation of the Single Market and Canada, Mexico and US signing the North America Free Trade Agreement.
While protectionist governments have always made efforts to re-introduce barriers to free trade in the past, such as the steel tariff imposed by the Bush administration back in 2002, these disputes were always addressed through the Dispute Settlement Body of WTO.
In fact, the US had to remove those tariffs as WTO’s verdict was that these were not imposed during a period of import surge. Thus far, trade disputes have always been addressed through WTO’s arbitration and countries have accepted the organization’s verdict.
It is the first time in the last few years where major trade partners, such as US and EU, consider direct retaliation moves to each other’s barriers to trade. Moving away from WTO dispute settlement means that retaliation can easily escalate and we might find ourselves in the middle of a trade war between the two most important trade regions in the world with possible implications for other countries. A tit-for-tat approach means that consumers and industries in both regions will lose simply by paying higher prices for final and intermediate goods.
Higher prices that will not necessarily lead to the creation of more jobs as the Trump administration is arguing. In any case, the last time import tariffs were imposed on steel from the US, the actual effect for the US economy was a negative one.
Fragkiskos Filippaios is a reader in international business at the Kent Business School at the University of Kent.