The big problem with a trade war is that nobody can win it

The big problem with a trade war is that nobody can win it
After the US announced it would add 25% tariffs on steel imports, the EU revealed it would target imports from America including blue jeans, bourbon whiskey, and peanut butter. Picture: Ben Birchall/PA Wire

According to an African proverb, “When elephants fight, it is the grass that suffers”. The same is true for full-blown trade wars: When major economies clash, developing countries will be among the hardest hit.

On June 1, the US administration imposed import tariffs of 25% on steel and 10% on aluminium. The levies will affect not just China, but also Canada, Mexico, and the European Union.

The European Union is expected to launch a raft of retaliatory tariffs against US exports tomorrow.

American blue jeans, motorbikes, and bourbon whiskey will be targeted, trade commissioner, Cecilia Malmstrom, confirmed.

Brussels drew up the list of products in March, when Mr Trump initially proposed the 25% tariffs on steel imports and 10% on aluminium, which also target Canada, Mexico, and other US allies. Cranberries, orange juice, sweetcorn, and peanut butter are among the other goods targeted.

As Malmström, the EU Commissioner for trade, observed at a recent event held by the United Nations Conference on Trade and Development (UNCTAD), “We are not in a trade war, but we could be.” It is a situation that should concern everyone.

We know, from history, that nobody ‘wins’ in a trade war. Tariff hikes by major trading countries represent a reversal of efforts since the end of World War II to eliminate trade barriers and facilitate global commerce.

Since the General Agreement on Tariffs and Trade took effect, in 1947, the average value of tariffs in force around the world has declined by 85%. That is no coincidence; rather, it is the result of multilateral cooperation, and eight rounds of global trade negotiations, first under the GATT, and then under its successor, the World Trade Organisation.

Tariff reductions, together with technological advances, drove the extraordinary expansion of global trade that we have witnessed in our lifetimes. In 1960, trade as share of world GDP stood at 24%; today, it is nearly 60%.

The expansion of trade has fuelled economic growth, created jobs, and increased household incomes around the world. It is a key factor behind the rise of the global South, where dozens of developing countries have undergone strong economic growth and positive societal change.

And it made possible one of the most remarkable achievements in human history: lifting 1bn people out of poverty in just two decades.

Yet, trade expansion has not benefitted everyone equally. And in some cases, it has resulted in environmental degradation and economic displacement, with many people now left behind. These are serious and legitimate issues. But unilateralism is not the way to address them. Global challenges demand global solutions.

Unfortunately, current trade actions augur a loss for everyone. In a trade war, companies across a wide range of sectors will lose profits, and workers will lose jobs. Governments will lose revenue, and consumers will have fewer product choices available.

And, no matter where they are, firms, governments, and households will incur higher costs.

Even worse, a global trade war might jeopardise the multilateral trading system itself. It would, no doubt, result in tariff increases greater than anything we have seen in recent history.

UNCTAD research shows that average tariffs could rise from negligible levels to as high as 30% for US exporters and 35% and 40% for EU and Chinese exporters, respectively.

So, even if the ‘elephants’ have sufficient economic weight to withstand a trade war, they would not benefit from one. And developing countries, which played no role in starting the conflict, would be even less able to afford it. On average, tariffs applied on developing countries’ exports could rise from 3% to 37%.

But whereas average tariffs affecting countries like Nigeria and Zambia probably would not go above 10%, those against Mexico could reach as high as 60%. Likewise, countries like Costa Rica, Ethiopia, Sri Lanka, Bangladesh, and Turkey could face average tariffs of 40%-50%.

A trade war would be a severe blow to the world’s poorest countries, and to the hope of doubling “least-developed countries’ share of global exports” by 2020, under the Sustainable Development Goals.

It would compromise the fragile economic recovery since the global financial crisis a decade ago, thus undercutting growth and development around the world. And it would limit the extent to which trade could be used to advance global goals.

The harm caused by a full-on trade war would be felt well beyond international commerce. Today’s trade climate reflects a disturbing global trend toward nationalist unilateralism.

The countries that helped reshape our world for the better, through trade, are now abandoning international cooperation, and that shift may have serious implications for other areas, such as global efforts to combat climate change and ensure peace and prosperity for all. The easiest way to win a trade war is to avoid it altogether.

Mukhisa Kituyi is secretary-general of the United Nations Conference on Trade and Development (UNCTAD).

Copyright: Project Syndicate, 2018.

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