Collateral damage: Nobody wins in a trade war

The international rules-based trading system is essential to the economic wellbeing of New Zealand and other small states. For the little guys without real economic heft (or gunboats), the WTO and the broad and deep connections of sixty years of economic integration mean both a seat at the table and confidence in a predictable, stable and mostly fair system of global economic governance.

Not surprisingly, then, President Trump’s twitter declaration in early March that “trade wars are good and easy to win” as he announced new steel and aluminium tariffs was cause for unease. Trading partners’ reactions raised the anxiety levels higher. The EU, Canada and others signaled that they intended to put in place safeguard mechanisms to avoid a flood of displaced steel and aluminium; the EU and China have also prepared lists of counter-tariffs on iconic US products such as Harley Davidson motorbikes, bourbon, pork, nuts, wine and fruit (although in the EU’s case, the temporary exemption on steel tariffs granted to it by the US seems to have forestalled action for now).

Earlier this week, President Trump announced that in line with a ‘Section 301’ investigation into alleged Chinese intellectual property theft and forced technology transfer, he intended to impose tariffs on $50 billion of Chinese imports, including products ranging from car parts to washing machines to flatscreen TVs. China swiftly responded with a list of its own retaliatory tariffs on 106 US products including soybeans, beef, cars, planes and chemicals, accounting (along with its earlier round of counter-tariffs) for around one-third of US exports to its market. China has not yet said when the tariffs will take effect. The US is also likely to announce new restrictions on Chinese investment later in the week.

Unlike the global rules-based system, which is premised on a system of carefully balanced rights, obligations and concessions, unilateral action and tit-for-tat responses have a high risk of generating “collateral damage”.

New Zealand and other small suppliers of steel and aluminium will be hit by the US tariffs even though they together make up only a fraction of imports and were not the target of US action. (By contrast, the suppliers making up the lion’s share of exports to the US market have been granted at least a temporary reprieve.)

US manufacturers who use imported metals in machinery, construction, vehicles, cans and consumer goods (along with other downstream industries and broader communities) will find life more difficult as the cost of their inputs goes up, potentially significantly, in response to the US tariffs.

Farmers and food producers, manufacturers and consumers, both in the US and in retaliating economies, will suffer as prices are pushed up, supply chains interrupted and investment turned off as a result of the tariffs. Third countries including New Zealand may see new demand in some markets in the short term, but the overall disruptive impacts are unlikely to be good news.

Finally, economies in Asia which participate in the increasingly dominant business model of global value chains will be hit in the crossfire: some 30% of the value of Chinese products exported to the US is estimated to come from other Asian sources, and they will no doubt feel the effects as US tariffs hit demand for the finished products.

While the US Section 301 announcement also noted the US’s intention to take a WTO legal dispute against China, that seems very much a second-order action (and one, it should be noted, with some interesting implications if the US continues to refuse to appoint the requisite replacement Appellate Body judges). In the short term at least, whether this turns out to be a skirmish or the start of something bigger, the last few weeks have shown that in the modern interconnected world, you don’t have to look hard to find unintended consequences.

This blog post was prepared by Stephanie Honey, Associate Director of the New Zealand International Business Forum