Commentary: Our Last Trade War Was a Global Disaster. This Time Won’t Be Any Different.
In announcing sweeping new tariffs on imported steel and aluminum, President Donald Trump last week tweeted that “trade wars are good, and easy to win.” But who wins a trade war?
The lesson of history is clear: Trade wars have no winners. And they are certainly not good. They tend to damage the economies of all countries involved, raising tensions and increasing the risk of international conflict.
The last full-blown global trade war was sparked by the infamous Smoot-Hawley tariff of 1930. As the U.S. slid into the Great Depression, two members of Congress introduced a bill whose goal was to protect struggling American farmers by raising tariffs on agricultural imports. As the bill moved through Congress, the limited farm protection bill snowballed into a protectionist behemoth, raising nearly 900 tariff lines covering 20,000 agricultural and manufactured products. Over the objections of economists, trade advisors, and foreign governments, President Herbert Hoover signed the bill into law.
The reaction from around the world was swift and punitive. Canada, America’s leading trade partner at the time, imposed retaliatory tariffs that cut U.S. exports to Canada by half. Several other European countries enacted protectionist policies in retaliation to the new U.S. tariff. A trade war had begun.
Who won this war? As the tragedy of the interwar period makes clear, everyone lost. In the U.S., the Great Depression worsened, and economists agree that trade protection not only deepened the country’s economic collapse but prolonged it. Global trade almost completely collapsed and the tariff was likely responsible for about half of the free fall. U.S. exports fell by about 40% over the course of the next year, crushing American industries. U.S. imports fell by nearly the same amount, devastating the economies of our trading partners. These dire economic straits around the world increased antagonisms between countries, led to nationalist economic policies designed to impoverish other nations, facilitated the rise of fascist strongmen promising to restore economic growth by any means necessary, and contributed to the outbreak of World War II.
The steep tariffs Trump proposed last week are designed to protect a very specific and small set of constituents: owners and workers in the steel and aluminum industries. Trump argues that protecting domestic metals production is a matter of national security. While this may be true for rarer metals, it is tough to make this argument in regards to aluminum and steel, which are plentiful in supply. And if the U.S. invokes the national security argument to get out of World Trade Organization rules on tariffs—rules we led the way in creating—what’s to stop the rest of the world from doing the same thing?
It is imperative that our policymakers find ways to compensate Americans whose jobs are threatened by global economic integration. But that is best done through generous social welfare policies and support in making the transition to new employment. Raising tariffs is an economically irrational way to protect workers from foreign competition.
The reason for this is that tariffs that protect one industry make the rest of the economy worse off. Tariffs raise the cost of imports, and retaliatory tariffs (which some of our most important trading partners have already threatened) make it more difficult to export. America’s globally competitive firms in a range of industries will be doubly damaged: The price they pay for imported steel and aluminum products will rise while retaliatory tariffs make it more difficult for them to export. If our firms become less competitive, they will hire fewer workers or layoff existing workers, or both, and the costs of goods for American consumers will go up as well. The new tariffs will make cars, appliances, and anything else that uses steel and aluminum more expensive.
Is a trade war “easy to win”? Far from it. A trade war today would be much more damaging for the U.S. than the trade war of the 1930s, as exports today account for a greater proportion of U.S. gross domestic product than they did on the eve of Smoot-Hawley. If our trading partners retaliate as they have threatened (the European Union says it will target blue jeans, orange juice, Kentucky bourbon, and Harley-Davidson motorcycles, among other products) American producers stand to lose billions in export revenues and thousands of Americans could lose their jobs.
At the international level, history teaches us another thing: The more countries trade with each other, the less likely they are to end up at war. In the face of rising nationalism and authoritarianism worldwide, it is in America’s best interest to maintain the rules-based free trade system that creates a powerful incentive for peace.
Mary Anne Madeira is an assistant professor of political science at Queens College, City University of New York.