How Trade Wars Can Spiral Out Of Control And Lead To War

How Trade Wars Can Spiral Out Of Control And Lead To War


This article has been updated

President Donald Trump is threatening 25-percent tariffs on Chinese goods, much higher than the 10 percent previously threatened, and if it leads to a war, 45 tweeted, “Trade wars are good, and easy to win.”

China responded, saying if the tariffs happen, it will impose levies on $60 billion of U.S. products.

In a statement issued Friday, China’s cabinet said the government is preparing to impose duties ranging from 5 percent to 25 percent on 5,207 American goods.

Jim Rogers, the chairman of Rogers Holdings, has not been silent about why he thinks Trump is wrong. Back in August 2016, before Trump became president, Rogers predicted that if the reality TV personality won the election and implemented the policies he ran on, there would be chaos in financial markets.

“If Mr. Trump does what he says– I’m just saying what he says– if he does, it means bankruptcy and war,” Rogers said. “I mean, trade wars. He is determined, he says, to have lots of trade wars. If he does that, that’s always, always led to bankruptcy.”

Today, two years later, the Shanghai Composite index fell 2 percent as investors reacted to the latest threat by the U.S to hike tariffs on Chinese exports. Hong Kong’s Hang Seng fell 2.2 percent, Japan’s Nikkei dropped 1 percent, Germany’s DAX declined nearly 2 percent and France’s CAC 40 shed 0.9 percent according to CNN.

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Although Trump has bragged that he’s a billionaire, he doesn’t act like one, Washington Post reported. Without his tax returns or a verifiable account of his personal net worth, we have to take his word for it.

Rogers said that Trump has not learned from the mistakes of history and his policies will be detrimental to the U.S. economy, and could even lead to military conflict.

China has already retaliated after U.S. tariffs on $34 billion of Chinese goods went into effect in July.

“If someone wants a trade war,” China’s commerce minister said, according to BBC. “we will fight to the end.”

Trade wars
A Soviet-made Iraqi T-72 tank explodes after being hit by a TOW missile in the desert on the outskirts of Habaniyah, Iraq Friday, July 4, 2003. U.S. Army soldiers from A Company 3rd Battalion 7th Infantry Regiment, code-named Attack, shot TOW missles at the tank from their Bradley fighting vehicles for a fireworks display as part of their Independence Day festivities. (AP Photo/John Moore) IMAGE: ANITA SANIKOP

Taking it with a grain of salt

Markets react to Trump’s aggressive posture, but that doesn’t mean a trade war is likely, said Ray Dalio, an investment officer and co-chairman of Bridgewater.

“Take it with a grain of salt,” Dalio wrote in a March 5 Linkedin article:

“The Chinese way of negotiating is more through harmony than through confrontation, until they are pushed to have a confrontation, at which time they become fierce enemies,” Dalio said. “They are more long-term and strategic than Americans, who are more short-term and confrontational … The Chinese prefer to negotiate by finding those things that the people they are negotiating with really want and that the Chinese are comfortable giving up … Because there are now many such things that can be exchanged to help both parties (e.g., opening the financial sector in China, Chinese investment in the US, agricultural product imports to China, etc.), there is plenty of room for there to be big win-wins.”

The Trump administration has forgotten an important lesson from the Great Depression, said Charles Hankla, an associate professor of political science at Georgia State University.

Trump’s approach to trade seems based on a false understanding of how the global economy works — one that plagued American policymakers nearly a century ago. Why?

Trump’s “America First” orientation assumes that the U.S., as a dominant force, can behave freely and independently in trade. However that dominance is fading, Hankla wrote in The Conversation. “America First” disregards how America’s trading partners will respond to the new U.S. protectionism — the same thing lawmakers ignored during the Great Depression.

The Smoot-Hawley Tariff Act of 1930 raised duties on hundreds of imports to ease the effects of the Depression by protecting American industry and agriculture from foreign competition. Instead it helped prolong the Depression.

Many U.S. trading partners reacted by raising their own tariffs, which helped shut down world trade.