No one ever wins a global trade war

John W. Schoen Senior producer • Profile • E-mail

Recent skirmishes in global trade have prompted readers to wonder why protecting American jobs with tariffs is such a bad idea. Unfortunately, in a global trade war, everybody loses.

We import way more than we export. Given that, why wouldn't we be generally helped (rather than hurt) in a trade war with China? I accept both countries would be damaged. But why wouldn't the country that exports less to the other be damaged less?
- Robert M., Port Orange, Fla.

The problem with trade wars — like all wars — is that everyone loses. Even if your army wins a battle, people get killed on both sides. So you’re better off not having to fight the war to begin with.

The latest skirmish between the U.S. and China was really more like a brush-back pitch. The Obama administration, responding to a complaint from the United Steelworkers union, slapped a 35 percent tariff on Chinese tires. China complained that tariff was unfair and grumbled about maybe putting restrictions on imports of U.S.-produced chickens.

The alleged economic harm from Chinese tire imports has been tiny. Something like 5,000 tire production jobs have been lost since 2004, many the result of declining car sales, not Chinese imports. U.S. tire makers will likely shift production to other low-cost producers in other countries, so it's hard to see how the tariffs will being back jobs.

The harm to China from the tariff will also be small: most of the lost shipments to the U.S. will be diverted to other markets.

The move is part of a larger tug-of-war between two large, tightly connected economies that would both be ill-served by putting up trade walls. China relies on U.S. consumers to buy its goods; the U.S. relies on China to recycle those dollars to buy U.S. Treasury debt.

There’s more to trade policy than tariffs. The U.S. has long complained to China that by keeping its currency artificially low in relation to the dollar, it has created an unfair price advantage for Chinese-made goods sold into foreign markets. But the U.S. dollar policy seems to be accomplishing the same thing. The weak dollar may be bad for investors holding U.S. debt (including the Chinese government), but it’s great for U.S. exporters selling goods into foreign markets.

Though it’s true that the U.S. still imports more than it exports, those exports grew strongly over the past decade: doubling from the post-recession trough in the fourth quarter of 2001 to the peak in the third quarter of 2008, when exports added $1.6 trillion to U.S GDP.

Since then, they’ve fallen as the recession deepened. But imports have fallen even faster as consumers tightened spending and oil prices fell sharply. As result, the $738 billion trade gap in the second quarter 2008 was cut by more than half by the second quarter of this year. So our trade deficit – about 2 percent of GDP in the second quarter – really isn’t all that big.

The deepening global recession has raised political pressure in all countries to try to protect their domestic industries, and import restrictions have been rising.  (The “Buy American” provisions of the economic stimulus package are but one example.) But so far, the level of protectionist measures hasn’t risen to a level that pose a major threat to the global economic recovery.

Let’s hope that doesn’t happen. One of the major factors that prolonged and deepened the Great Depression was an outbreak of global trade barriers. Today, world trade agreements are in place to limit a recurrence. If the major players stick to those agreements, they’ll go a long way to helping the global economy get back on track.

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