The adage, “When goods don’t cross borders, soldiers will,” is commonly linked to the 19th-century writer and free-market economist Frederic Bastiat. While these precise words do not appear in Bastiat’s published works, their essence aligns with perspectives he would likely have supported.
This statement underscores that free trade not only enhances wealth across various societies but may also be vital for maintaining peaceful relations. History shows that disruptions in free trade often correlate with the outbreak of wars, which initially manifest as financial conflicts before escalating into armed confrontations. This serves as a critical consideration as President-elect Trump prepares to implement import tariffs.
For many, global trade has expanded so consistently that only the older generations recall a time without this phenomenon. However, global trade hasn’t always been on the rise. In fact, there have been extended periods of contraction throughout history, occurring over millennia.
An emblematic example is the Silk Road, established by China’s Han Dynasty in 130 BC. This ancient route facilitated trade and cultural exchange between the East and West for approximately 1,600 years, allowing not only goods but also knowledge and even diseases to flow among diverse civilizations.
Like many seemingly enduring elements of civilization, this trade route eventually diminished. Following the fall of the Byzantine Empire to the Turks in 1453 AD, the Ottoman Empire ceased connections with the West, resulting in a shift towards geopolitical isolation.
The Decline of Global Trade
Currently, global trade predominantly occurs through shipping cargo across international waters. Over the last two centuries, trade cycles have often expanded for such prolonged periods that generations have known only the flourishing half of these trends. This has led many to mistakenly view increased global trade as a linear development.
The last time individuals from the U.S., Japan, and Western Europe lived through a contraction in global trade was prior to 1960. China’s recent trade expansion began in the 1970s, while Eastern Europe’s growth commenced in the early 1990s.
Looking back to the first half of the 20th century reveals a contrasting reality. From the onset of World War I until the 1960s, global trade as a share of overall economic activity actually declined for nearly 50 years.
This decline can be traced back to the disintegration of the classical gold standard during World War I, which precipitated rampant hyperinflation in Eastern Europe and an epic stock market bubble in the United States.
When the bubble burst, the world plunged into the Great Depression, further exacerbated by the Smoot-Hawley Tariff Act of 1930 and retaliatory tariffs, leading to the deterioration of what remained of global trade. This period also foreshadowed the onset of World War II.
It wasn’t until well after World War II that international trade began to resurge. Although hesitant at first, trade flourished during the latter half of the 20th century. Nonetheless, this does not guarantee that trade will continue to grow indefinitely.
Political Intervention
Geopolitical events have repeatedly disrupted or reversed long-term trends in global trade expansion. The World Trade Organization (WTO) releases an annual World Trade Report that provides insights into the state of international trade alongside various facts and anecdotes. A notable insight from the 2013 World Trade Report states:
“Politics [at times] has intervened – sometimes consciously, sometimes accidentally – to slow down or even roll back the integrationist pressures of technology and markets. It is this complex interplay of structural and political forces that explains the successive waves of economic integration and disintegration over the past 200 years; and in particular how the seemingly inexorable rise of the ‘first age of globalization’ in the 19th century was abruptly cut short between 1914 and 1945 – by the related catastrophes of the First World War, the Great Depression and the Second World War – only to be followed by the rise of a ‘second age of globalization’ during the latter half of the 20th century.”
Forecasting the future based on historical economic patterns can sometimes be an exercise in futility. At present, we may be at the brink of another extended global trade contraction, spurred by a politically motivated trade war.
Trump’s campaign indicated a pledge to implement tariffs of at least 60 percent on Chinese imports, aiming to address the alarming $300 billion annual trade deficit with China and reinvigorate American manufacturing.
The aspiration is that these tariffs will facilitate the return of factory jobs to America’s rustbelt, steering the nation toward a vision of economic rejuvenation. Moreover, it’s posited that this approach could help lift the disadvantaged American workforce out of dire circumstances.
While these aspirations are commendable, the efficacy of a full-blown trade war in achieving these goals remains questionable. Time will soon provide answers.
Implications of the Trade War
In its simplest form, a trade war leads to a contraction in trade. Reduced trade equates to fewer goods being imported and exported. This decline results in slower economic growth and diminished wealth generation.
Ultimately, a trade war signifies a shrinking economy, fewer choices, and reduced global wealth.
American consumers, heavily reliant on imports, will face higher prices and a reduction in available options.
As the trade war intensifies, unexpected and counterproductive consequences may arise. American travelers in China might encounter high-quality electric vehicles from lesser-known brands at prices as low as $10,000. These affordable options will likely remain inaccessible in American markets, while workers in the U.S. earn $20 per hour to produce socks that will quadruple in price.
Regardless, Trump remains determined to impose across-the-board tariffs of 10 to 20 percent, with a significant 60 percent levy specifically targeted at China.
The stated purposes of these tariffs, apart from boosting domestic manufacturing, include generating revenue to offset Trump’s tax cuts. The combination of import tariffs and tax reductions is likely to cause a drop in import volumes while fostering increased household and business expenditure, leading inevitably to higher consumer price inflation.
There looms the danger that this politically driven trade war could spark a global conflict. If that occurs, can we prevent the repercussions before it’s too late?
Historically, once a global trade war begins in earnest, a swift resolution proves elusive. Much like a California wildfire, such conflagrations are challenging to control once started.
Only through complete devastation—a world war and a reset of power dynamics—can a trade war reach its unfortunate conclusion.
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Sincerely,
MN Gordon
for Economic Prism
