increase the peace How to stop a trade war

If the EU doesn’t want a trade war, then it should lead by example, argues the head of German Council of Economic Experts.
Quelle: dpa
Some economists share this opinion.
(Source: dpa)

He just keeps doing it, and he really, really seems to like it. At the beginning of March, US President Donald Trump shocked the international public when he announced, via Twitter, that trade wars were a good thing – and easy to win. With his announcement to impose tariffs of 25 percent on steel imports and 10 percent on aluminum imports, he is once again testing the resiliency of US relations with its trading partners.

Above all, his announcement sends a political signal to a domestic audience – especially Mr. Trump's voters in formerly industrial strongholds of the US – all the while ignoring the macroeconomic consequences for the country.

The official justification for the tariffs – that they are being introduced to protect national security – is more than flimsy. The rules of the World Trade Organization do indeed provide for exceptions in this case. But even the US Department of Defense estimates that the country's defense industry needs only 3 percent of the total domestic production of steel and aluminum.

The rest of the world should seize this opportunity to demonstrate the benefits of free trade.

There is no doubt that other countries also use tariffs as a tool of trade policy to combat perceived, or actual, interference from abroad that distorts competition. This was part of the reason why the EU imposed so-called anti-dumping duties on Chinese steel imports last year.

From the US perspective, however, using this argument would have little effect. The country will only have imported about $1 billion worth of steel from China, or 3 percent of all steel imports, in 2017. In fact, around 21 percent of US steel imports come from the EU, making it the US's largest supplier, followed by Canada (18 percent) and South Korea (10 percent). Accusing these countries of dumping is not going to convince anyone.

Given all that, Mr. Trump's move can only be seen as an internal maneuver. During the 2016 election campaign, he promised to bring jobs back to the American steel and aluminum industry by introducing tariffs. From an economic point of view, this promise is untenable. Imports from Europe and Canada have hardly led to a decline in employment in these industries. The real reason is structural change, driven by technical progress.

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The attempt to counter this progress with tariffs will inflict economic damage. Analyses clearly show that the macroeconomic consequences of tariffs are not positive for any country – not even for the US itself. In recent decades, increased integration in global trade has been accompanied by great gains in human welfare. Emerging economies have caught up, and global poverty has been noticeably reduced. The same applies to richer economies. In Germany, for example, it is estimated that about half of the growth in real income per capita since 1990 has been due to profits from trade.

These profits will be at risk if there is a race to install protectionist measures, or even to start a global trade war. Shortly after Mr. Trump's announcement, government representatives in Europe, China and Canada also spoke of introducing or increasing tariffs – and not only on steel and aluminum, but also other goods. In the 1930s, a similar spiral of protectionism led to a global trade war with devastating consequences for the world economy. That is why policymakers' primary objective now must be to prevent a trade war.

As Mr. Trump apparently wants to test how far he can go with trading partners, the best response should combine three elements. The first is a strong argument in favor of free trade, against which Mr. Trump must be fighting a losing battle. Secondly, the international community should make clear that it is prepared to fight for free trade. It should be as united as possible when it comes to invoking international trade rules and exploring concrete possibilities – for example, within the WTO – for punishing violations.

Then finally, the rest of the world should seize this opportunity to reap the fruits of even more trade integration, thereby demonstrating the benefits of free trade themselves. There is particular potential for trade liberalization in the area of so-called non-tariff measures, in the services sector and in digital commerce. The EU would also be well-advised to seek new free trade agreements with China, India or the South American trade bloc, Mercosur, for example.

A version of this article originally appeared in the business magazine WirtschaftsWoche. To contact the author: [email protected]