Trade wars cause world wars, history shows. Will this time be different?

Cary Huang says the risk of armed conflict has to be acknowledged, with the trade war now affecting a swathe of US allies, and with the two main actors in the dispute – China and the US – showing every intention of a fight to the end in a tit-for-tat tussle

PUBLISHED : Tuesday, 17 July, 2018, 12:55pm
UPDATED : Tuesday, 17 July, 2018, 7:28pm

US President Donald Trump’s conviction that “trade wars are good, and easy to win” certainly runs against well-established economic doctrine and history, both of which suggest no one can win and all will lose in such a mutually destructive war. 

Worse can happen than just material loss to the countries directly involved. While a country may try to destroy another by targeting its economy rather than its military, history suggests that a full-blown trade war inevitably leads to a shoot-out between nations.

The first shots of the current war have been fired, with the United States and China each imposing punitive tariffs of 25 per cent on US$34 billion worth of the other’s imports. Neither Washington nor Beijing has shown any intention of backing down; both appear prepared for a tit-for-tat fight.

US tariffs are expected on a further US$200 billion worth of goods, though Trump has threatened to target US$500 billion worth of Chinese imports, approximately the value of China’s exports to the US last year. Meanwhile, Beijing has pledged retaliatory measures of “the same scale and intensity”.

Trump has also fired a salvo of shots on all of America’s main trade partners, including its allies in the post-war Atlantic trading alliance, from Canada, Mexico and South Korea, to Japan and Germany.

When giants go to war, the epic fallout is felt from Singapore to Seoul

The developments have effectively put an end to the more than two decades of normal trade since the founding of the World Trade Organisation in 1995.

Watch: The biggest trade war in economic history begins

History provides ample evidence that trade problems have heightened tensions among nations. Such fights lead to economic crises, and trigger political and social crises and, finally, trigger wars.

A full-blown trade war often features the combination of a tariff war and currency war. In practice, exporting countries will, in response to imposed tariffs, resort to currency manipulation, moving to cheapen their money to offset the impact of the tariffs.

But a competitive devaluation among trade partners makes a currency war meaningless. Once countries realise that currency wars do not work, they resort to all the tools available to set up barriers to block trade. This seems evident amid the escalating US-China trade feud. The slump in the renminbi in past few months is stoking fears in markets that China’s policymakers are deliberately pushing the currency’s depreciation in an effort to offset the US tariff hikes.

Trump staring down barrel of yuan devaluation in trade war

Before the first world war, most countries accepted the classical gold standard of pegging their currencies to gold as an effort to anchor smooth trade. However, from 1913, countries began to suspend or abandon the system as they devalued their currencies to compete for export markets in the ongoing tariff war.

The end of the first world war sparked the first worldwide currency war, starting in Weimar Germany in 1921, followed by France in 1925. In the end, all the major economies scrambled to devalue their currencies – sterling, the franc and the US dollar – throughout the 1930s.

In 1930, US president Herbert Hoover signed into law the Smoot-Hawley Tariff Act, which intensified the currency war and deepened the Great Depression. The protectionist law raised tariffs on more than 20,000 imported products and triggered retaliation from many US trade partners.

Trade wars stoke nationalism and hatred among people and finally trigger wars, as evidenced by the breakout of the second world war: the Japanese invaded Manchuria in 1931, and the whole of China in 1937; the Germans invaded Poland in 1939, then the rest of Europe; and the Japanese attacked Pearl Harbour in 1941.

Could Trump’s trade war turn into a third world war?

A quote often attributed to the 19th-century French economist, Frédéric Bastiat, goes: “When goods do not cross frontiers, armies will.” It is obvious that the current US-China trade war is stoking geopolitical tensions between the world’s two largest economies and chief political adversaries, as they become more confrontational over their discord on maritime issues in the South and East China seas and over Taiwan.

History often repeats itself if we do not learn from it. The two full-blown trade wars some 80 and 100 years ago helped to ignite the two world wars. Could such a catastrophe happen again?

Cary Huang is a senior writer at the Post