An Inconvenient Truth about Trade Wars

Robert A. Rogowsky,
Professor, Trade & Economic Diplomacy,
Middlebury Institute of International Studies
Adj. Professor, Georgetown University School of Foreign Service

The inconvenient truth about a Trade War is that you actually have to pay for it as you go. The weapons of a trade war—restricting our own desires to buy a trading partner’s goods until they cry uncle—are by definition pay-as-you-go. It hurts here and now. It may or may not disturb our sensibilities, but it is likely to deeply disrupt our lifestyle. As a result, democracies are not nearly as good at this as a more tightly controlled autocratic style system. It is a game that must be played with incredible skill, especially in a democracy.

The President thinks trade wars are easy and winnable. They are neither, as we are learning the hard way. War is hell. But conventional war—military actions we normally think of as war—is different than a trade war. The United States has engaged in many conventional wars. They are horrendous activities that cost American lives and many hundreds of billions of dollars.

Wars are heavily debated and much anguished over, as they should be. However, American wars have one convenient feature. They are conducted by professionals who have opted to join the military, they happen far away, and no one seems to have to pay for it because the government borrows the money. There is no Afghanistan War surtax this year. Or any year. Debt explodes, but that is someone else’s problem (our grandchildren, I suppose).

A conventional war witnessed on the news can disturb our sensibilities, but it doesn’t disrupt our lifestyles. As a result, it can be waged even by a democracy.

The inconvenient truth about a Trade War, however, is that you actually have to pay for it as you go. The weapons of a trade war—restricting our own desires to buy a trading partner’s goods until they cry uncle—are by definition pay-as-you-go. It hurts here and now. There is no professional army to send off to fight. It is not conducted far away. There is no deflecting the costs into the distant future. It may or may not disturb our sensibilities, but it can deeply disrupt our lifestyle.

Yes, there are winners and losers in a trade war. On the other hand, trade liberalization creates winners and losers. Protectionism creates winners and losers. Policy stasis creates winners and losers. The creative destruction of capitalism inevitably leaves winners and losers in its wake. This is the great advantage of free and open markets.

The problem is that because a trade war is both up-front-and-personal and pay-as-you-go, it is extremely hard for a democracy to conduct it well. The intense pressures being put on the Administration by the ‘losers’ are highly likely to get the President to blink (if his immigration enforcement is any indicator).

Many will be relieved when the President caves. The truth is, however, that caving is not the right solution. Trade is a positive-sum activity– more is good. But trade policy in every country (including the United States) is essentially mercantilist. Trade negotiations are about reducing the barriers created by domestic politics. It is often ‘war by other means,’ and at times it must be aggressive. The United States has used its economic muscle to twist other countries into policies we prefer. Every country that can do it does do it. China is showing great deftness at this game. When negotiations get too aggressive, we call it war.

The question is how to do it well. It is a game that must be played with incredible skill, especially in a democracy. It can require more skill than for a military conflict because the weapons impose immediate costs—who will pay tariffs immediately and who will soon be punished by retaliatory tariffs. The range and scope of these weapons, and their consequences, will be determined a little by strategy, a lot by luck and a whole lot by sheer special interest politics.

Clearly the United States is not doing it well. The U.S. non-strategy is impulsive, insular, ill-conceived, and ignores key stakeholders. The internal battle among Trump and parts of his own administration and the Republicans in Congress over how to punish or to aid the Chinese industrial giant ZTE is a good example. ZTE, a serial violator of US law, is facing both severe punishment and tactical support by various parts of the Trump Administration. Both sides of this intra-Party fight are trying to best use this weapon in the trade “war” with China, but at bewildering cross-purposes.

Here is the larger problem. Good strategic trade policy identifies the two, maybe three critical objectives, carefully aligns weapons and allies, and targets the battle to those objectives. Team Trump has opened fronts willy-nilly across the globe. Losers abound (see Harley-Davidson), winners are uncertain, allies are alienated, and any important objectives are lost in the melee. As the losers garner political support, the weapons for an effective trade war shift and wane, and eventually disappear.

The most important point is that even a brilliant trade policy conducted in a well-functioning democracy is at a disadvantage in the face of a strong authoritarian system, where decisions are made by a “technocratic elite of highly-educated bureaucrats under party control” with both the authority to effectively apply its economic weapons and the patience to employ them for the duration.

It is not at all clear a democracy can win against such an opponent. It is certainly clear that a lone democracy—even the largest one– confronting a very large and determined authoritarian structure should not open simultaneous fronts against every possible ally.

This self-destructive strategy seems to be exactly how Team Trump is conducting the war. Not to mention that no one seems to know just what success actually means to the Team. We will likely get all the destruction without any of the creation.

The most likely outcome to this ill-conceived multi-front trade war will be a group of solidly antagonized trade partners, substantial damage to the multilateral infrastructure, an end to unified support to help draw China into a liberal ruled base trading system, and a growing sense of defensive nationalism across the globe that will require years of exceptionally good diplomacy to overcome.

Robert A. Rogowsky is Professor and Program Co-chair of the Masters in International Trade & Economic Diplomacy at the Middlebury Institute of International Studies in Monterey, CA and Adjunct Professor of Trade & Diplomacy at Georgetown University’s Masters School of Foreign Service.
These essays are the opinions strictly of the author. They do not necessarily reflect the views of the Institute or any officials of the Institute.

 

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