The Coming Trade War: The New Trade Policy of the United States

On May the 30th, INCIPE organized a working breakfast titled The Coming Trade War: The New Trade Policy of the United States, presented by Pedro Schwartz, Rafael del Pino professor at the Camilo José Cela University and academician at the Royal Academy of Moral and Political Sciences.

The current balance of payments of the United States is not a problem per se, but rather a symptom of little of savings. Savings in the US are too low and the domestic consumption too high, which results in the purchase of foreign goods and services to meet this excessive demand. In order to solve the US trade deficit, it is necessary to reduce the government and private individuals’ budget deficit. Nonetheless, the current American administration seeks to reduce the trade deficit through tariff increases and other protectionist measures that are justified through the elusive argument of national security and the fuzzy concept of ‘fair and just trade’. American trading partners-either allies or rivals- such as the EU or China are ready to retaliate against such measures.

However, in the face of American protectionist measures, the European Union and other trading partners of the US should not retaliate with similar actions. The logic of economics is different from that of defense or security. Economics and trade are about cooperation and mutual benefit, not about relations of power and conflict between countries. It is all about the welfare of the people. In trade there should be no tit-for-tat.

International trade has increased the living standards of people all around the world, lifted large numbers of people from poverty, and allowed the development of many countries. The consumption of imported goods benefits the economy as a whole. Countries that are less developed and productive can trade with richer and more productive countries to grow. International trade provides consumers with a much larger variety of commodities to consume at lower prices, and it reinforces a country’s more efficient and innovative companies and destroys the least productive ones. Imports of cheaper raw materials and components reduces the costs of production, which, along with more efficient companies, lowers prices throughout the economy and promotes economic growth. Consumers always gain from international trade. However, the voices heard in parliaments calling for higher tariffs are those from domestic inefficient large producers. Unlike consumers, big producers have the resources and influence to lobby political leaders in favor of protectionist measure to guard their businesses from foreign competition.

Retaliatory tariffs hurt both the retaliated and the retaliating country, and they are likely to escalate into full-blown a trade war. By erecting barriers to trade we are giving up the benefits that were previously descried, and we risk a collapse of international trade such as the one in 1930 that so much aggravated the Great Depression. Additionally, from another perspective, the political effectiveness of economic sanctions and retaliatory tariffs in changing the behavior of a country is questionable. Especially in the case of the US under such a temperamental and unpredictable president that conceives international trade as a zero-sum game.

The best way for the EU to respond to President Trump’s administration’s protectionist measures is to completely liberalize its trade. Opening itself completely to international trade would lower prices and production costs. It would also make the EU more productive and competitive as to overcome the restrictions to imports imposed by the US. Moreover, reducing trade barriers might even appease President Trump, who would then spare the EU of American tariffs. However, this pro-free trade approach raises doubts from a social perspective (due to the adjustment cost that trade liberalization entails) and in the realm of geopolitics – where security, great power rivalry, and international balance of power are very significant.

Luis Enrique Moya Cánovas

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