Despite pulling back on his initial plans for imposing vast tariffs globally, Former U.S. President Donald Trump has still managed to disrupt the international commerce field. His administration set a uniform ten percent tariff on the majority of imported goods, which escalated for particular products like steel. The most impactful move was enforcing a 145 percent tariff on imports from China, a leading worldwide manufacturing giant, which was later agreed to be scaled down to 30 percent. These actions resulted in a series of trade disputes, with China at the forefront.
Although these disruptions to the global economy are impactful and feel unprecedented, history has seen similar situations. A retrospective analysis helps understand the potential implications of these tariffs on the world’s trade scene. The current issues are reminiscent of events preceding the inception of the World Trade Organization in 1995 and its antecedent – the General Agreement on Tariffs and Trade of 1947. Prior to these commercial standardization entities, countries manipulated commerce for mutual benefits. They deployed ‘hold-up problems’ – instances where one nation invests in another based on enduring relationships.
For instance, a country could establish oil structures in another state that only the progenitor could control or service. Once such deals were struck, influential countries could use the threat of altering these agreements to manipulate their partners. While these tactics may have short-term gains, they generally lead to deleterious long-term effects. Frequent exercises of such economic power reduce investment and economic growth but breed political instability. States subject to economic coercion might resort to military tactics, disrupting previously established commercial relationships.
Trump’s belief that his tariff policies will make the U.S. wealthier and more powerful contradicts historical evidence. In the early 1800s, U.S. traders initiated their business with the kingdom of Hawaii, a community where sugar plantations, mostly handled by American businesspeople, prevailed. The Reciprocity Treaty of 1875, crafted to support sugar farmers, allowed for tariff-free Hawaiian sugar import to the U.S. This boosted Hawaii’s economy thanks to the enormous sugar exports.
While this initially benefited Hawaii’s economic growth, it gradually increased Hawaii’s dependence on the U.S., allowing the latter to exploit this dependency. The U.S. demanded exclusive access to Pearl Harbour when the treaty was up for renewal, and removed tariffs on all foreign sugar, supporting domestic producers with subsidies to retain low prices. This undercut Hawaii’s cost advantage, essentially directing the American elite in Hawaii to seek annexation, despite significant opposition from the native inhabitants.
This detrimental pattern of trade dependency was not singular to Hawaii. The U.S. and European nations faced issues with investments in Mexico’s railroads, mining, and oil infrastructures when Mexico claimed them. Investment risks scared many nations away from international commerce. Early U.S. founders, Qing China, and ancient Russia curbed their trade interactions to limit dependency and potential conflict.
In this era, frequent trade wars led to instability, even catalyzing direct confrontations in some instances. For instance, the Smoot-Hawley Tariff Act of 1930, which increased tariffs on countless goods, instigated a global trade war, augmenting geopolitical rifts, and driving Germany, Italy, and Japan towards self-sufficiency and expansionism. Perhaps most notably, the U.S.’s decision in 1941 to impose tariffs and restrictions on Japanese oil, scrap metal, and aviation fuel led to Japan’s attack on Pearl Harbour.
Nonetheless, there were instances where trade prospered in this era, particularly post-World War II. In 1979, the U.S. and China normalized their ties and initiated permanent normal trade relations in 1980. However, this required annual renewals, conditioned on China’s commitment to human rights and nonproliferation. Despite never refusing status, the yearly uncertainty led to depressed trade and investment.
China swiftly sought membership in the WTO to secure its manufacturers’ access to the global market. This sparked a fierce debate within the U.S. regarding granting China accession to the WTO. The advocates of integration believed that intertwining China’s economy with global economies would discourage militaristic aggression and promote political liberalization. However, the skeptics feared that integrating China’s economy into the world might empower an authoritarian adversary.
Despite the opposition, the optimists won, and the U.S. permitted China to join the WTO in 2001. This inhibited the U.S. from threatening China with tariff increments yearly. China’s already thriving economy subsequently gained momentum. This marked a significant achievement for the WTO, as integrating the world’s most populous nation suggested it had reached its intended objectives.
The WTO, for the most part, succeeded in promoting global trade and accelerating economic growth, notwithstanding its failure to regulate China’s industrial policies promoting specific sectors over foreign competitors. That said, the global trading landscape shifted dramatically with the election of Trump in 2016. He discarded the WTO framework, employing tariffs as punitive tools and reintroducing the hold-up problems.
Under Trump’s administration, the U.S. withdrew from heeding the WTO’s guidance, violated its stipulations, and immobilized the organization’s appellate body to further destabilize the system. Countries, as a defense mechanism, adopted geoeconomic policies to counter these shifts. The European Union introduced its anti-coercion instrument, allowing tariffs imposition, restricted EU market access, or suspension of international obligations in response to economic coercion. The U.S.’s trade policy changes have potentially depressed global trade and foreign direct investment.
Although uncertain, the economic impact could be limited initially due to advisors who mitigated the effects of tariffs during Trump’s first tenure. However, in his recent term, businesses face amplified uncertainty, with Chinese and European Union companies striving to eliminate foreign components from their supply chains in response. These tariff measures may not aid the U.S. economy as intended, as uncertain domestic and global trade policies are likely to hamper business investment.
The U.S.’s constant amendment of trade agreements could discourage new investments in domestic production due to the risk of instantaneous tariff reduction rendering factories unprofitable. Also, instigating bilateral agreements, a common practice before multilateral trading systems, may not boost investment due to their challenging enforcement, potentially leading to further uncertainty.
Duplicating policies from the past could result in similar economic and political effects, weaken alliances, and intensify economic competition among nations. Trump’s tariff policies could foster military confrontations by reducing mutual dependencies. Lowering dependency on Taiwanese semiconductors, for instance, could embolden Beijing to invade or blockade Taiwan, assuming the U.S. won’t retaliate. These actions recall the pre-World War II period, with escalating tensions and the potential for conflict on the rise.
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