Trade War is On - Again

Well, we got it. Trade War. It seemed that the period of escalation of foreign trade protection measures was irreversible for us, as the countries realized that less foreign trade protection or more free trade were more worthwhile. It seemed that we would no longer need knowledge about foreign trade protection or trade policies.

Down-spiral as a result of every trade war

However, globalization has obviously gone too far, hitting too many layers of people who then found consolation or hope in populists who promised to increase protection and return services in industry that moved freely to the global south and east. And here's Trump for the US president, who took it seriously, which he promised in the election campaign - the introduction of duties. And so Trump started a trade war a week ago, which in the last days when the Trump with customs began to target imports from China, received a significant acceleration.

And this is most interesting thing in the whole story -the commercial war is taking place and escalating exactly as we have been able to track this in the past. Below is a short "trunk" of the economics of a trade war in which everyone is losing, although everyone counts on them-self to win by introducing an "optimal tariff rate" that will maximize the welfare of the home country at the expense of the rest of the world.

Trade war on the field

The intensification of trade relations between the US and China has gained new dimensions. After the US imposed additional customs duties on imports of steel and aluminum from China and Japan (25% on steel and 10% on aluminum) at the end of March, which also officially began a trade war with China, Beijing (as expected) returned a hit with customs on 128 US products, which in import amount to about three billion dollars. Among other things, China has imposed a 15% duty on imports of fresh fruit, nuts and wines and a 25% duty on pork and recycled aluminum.

The very next day, the United States published a new list of 1,300 Chinese goods (including a wide range of consumer goods, such as medicines, electronic devices, cars, shoes and furniture), which can take up to 25% customs duty. US President Donald Trump has been announcing them for some time as a measure to protect US intellectual property. In a special investigation, the Americans found that the annual value of the "Chinese site of American intellectual property" from $ 200 to $ 600 billion from fakes to theft of business secrets. At first, customs should hit $ 60 billion in imports from China, and now the figure has dropped to 50 billion. The Chinese have returned to the same extent several hours after the release of the new US list and threatened with 25 percent taxes on imports of 106 US goods, including soy, aircraft and cars, which also amount to US $ 50 billion of US imports. As reported by Washington Post , the Chinese response was expected, but it was surprising at the speed, which aroused concerns about the escalation of the trade war between the world's economic powers, which could severely affect both sides.

If you want to see how trade wars end in practice, look at the picture below (the spider web) that depicts the consequences of the global trade war that the republican senators Smoot and Hawley slaughtered in 1930 with today's legendary Smoot-Hawley law.

The source of the spider network is January 1929 (before "black Friday" and the outbreak of the Great Depression in the United States), when the value of the global trade amounted to just under $ 3 billion. A year later, despite the outbreak of the global economic crisis and the Great Depression in the United States, the value of world trade shrunk by only $ 250 million. Then the republican senators, Smoot and Hawley, set foot on the scene to realize what the Republicans promised in the pre-election campaign - an increase in customs duties on foreign products. In spite of numerous protests by businessmen and a petition of thousands of US economists, in June 1930, the then American (republican) President Hoover signed a Smoot-Hawley law that doubled US import duties (25.9% -> 50%). Affected countries immediately resorted to retaliation and the trade war escalated. The consequence of this trade war was that in only three years the value of world trade shrunk to just one-third of that of 1930 (to one billion dollars).

Do not forget that even at that time practically all reasonable people in the United States protested against this madness. In 1930, 1,028 US economists signed a petition against the Smoot-Hawley Customs Code. Henry Ford estimated the law as "economic madness" and spent the whole night in the White House to persuade President Hoover to not sign the bill. Even JP Morgan's chief executive went almost to his knees before Hoover, not to sign the bill. But it did not help, Hoover signed the law. The rest is history, including World War II.

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