The global economy is experiencing what experts believe to be its peak economic growth. Unfortunately, this growth is being threatened by the possibility of a trade war, which the United States has initiated. According to Kavan Choksi, the imposition of tariffs by nations would severely impact the global economy, causing a significant loss in economic welfare.
Not only would countries subject to tariffs experience losses, but nations that are bystanders in this ongoing conflict would also be affected. The protectionist actions’ implications would create permanent losses in economic output, effectively preventing the specialization that leads to increased global productivity. It is a dark time for the global economy, and a trade war could worsen this situation.
A trade war happens when one country throws a curveball at its counterpart by imposing indirect or direct import restrictions. It is akin to an economic tit-for-tat and tends to occur when countries perceive unfair trading practices by their competitors.
The situation is usually exacerbated by domestic trade unions or industry lobbyists who lobby politicians to implement policies that could lessen the attractiveness of imported goods. Unfortunately, trade wars can have devastating consequences, as they inadvertently engender inflation, disrupt supply chains, and crate global economies. Staying the course toward free trade is prudent as the benefits are manifold and far-reaching. (source: Investopedia)
Kavan explains the idea of protectionism is simple – restrict international trade to protect your country’s businesses and jobs and balance trade deficits. However, the consequences of protectionism can be far-reaching and damaging, particularly when trade wars ensue. A trade war can start between two countries or in one sector, quickly spreading to other sectors and countries not initially involved.
This “tit-for-tat” game of imposing tariffs and duties on imported goods can have catastrophic effects on the global economy, affecting the lives of consumers and businesses alike. It’s worth remembering that trade wars are usually a side effect of protectionism, and while they might sound like a superb game, the damage they inflict on both economies must not be forgotten.
The potential for an all-out trade war between China and the United States is becoming increasingly likely, and the consequences could be dire for the global economy. While both countries have much to lose, they must come to the negotiating table and address the key issues surrounding market access, intellectual property rights, and joint-venture technology transfer.
The eventual outcome will be heavily influenced by monetary policy and financial market responses, with the U.S. federal funds rate as a key driver. If financial stress materializes, credit flows could suffer, and investments, industrial production, and trade could be at a virtual standstill. Furthermore, a protectionist environment could lead to a decline in global equity prices, further exacerbating the impact of a trade war on the global economy.
The dangers of protectionism are weakening resilience, increasing inequality, and fueling conflicts.
The global economy has gone through some tough times in the past few decades, but some are questioning if international trade is truly deglobalizing. Although the numbers show slowed growth and even declines in some cases, the recent rebound of trade to its highest value is a promising sign for the future. While China has prioritized domestic consumption alongside international trade and investment, its share of global trade has fallen alongside India’s.
Kavan notes that it represents a shift away from an export boom both countries previously experienced and fewer imports of intermediate goods. However, the rest of the world is still growing its imports of intermediate goods and exports, hinting that global trade may not be losing its grip entirely.
The COVID-19 pandemic has caused several disruptions in trade as countries temporarily restricted exports of medicines and halted shipments of wheat and other foods. Nevertheless, despite these challenges, many governments are actively pursuing economic integration through various deals to facilitate the flow of consumer goods and make it easier for professionals to work in foreign countries.
This pursuit can be seen as a reflection of a larger trend toward globalization that has dominated economic discussions in recent years. However, “national security” and “reshoring” have become more prominent recently, perhaps reflecting a growing public sentiment prioritizing domestic production and security over global trade. However, the policies responding to this trend may take some time to catch up. (source: International Monetary Fund)
Worldwide Fallout: The Unequal Effects of Globalization on Workers and Superstar Firms
While the overall global standard of living improved in the last decade, many workers in advanced economies felt a sense of falling behind, with their situation worse than that of their parents. Extensive economic research reveals that these disparities were not evenly distributed but concentrated in communities exposed to competition from low-wage countries due to existing industrialization patterns.
The consequences of this division were especially felt in the United States and the United Kingdom, where political shifts occurred. At the same time, globalization created a cadre of winners: multinational “superstar” companies that thrived in the specialized global value chains, enjoying cost savings and higher profits. Kavan adds that a select group of highly compensated individuals experienced the benefits of expanding markets and new economic opportunities. As a result, some were left behind while others surged ahead.
Unpacking Pandemic Resilience: How International Trade Proved its Worth
During the COVID-19 pandemic, the call for resilience echoed throughout the world. But what does resilience mean? Defining and measuring it becomes challenging without a clear benchmark, as it depends on the specific shock. COVID-19 brought both a supply shock, with international suppliers facing lockdowns and slowing deliveries, and a demand shock, as the need for medical and durable goods skyrocketed. Kavan says that during the pandemic, disruptions in international trade led to short-term delays and shortages, which were widely seen as a crisis.
However, much of this was exaggerated, as markets proved remarkably resilient. For example, while the U.S. imports medical supplies from various countries, face masks are the only exception. Yet, even in this case, shipments from China arrived within months, effectively eradicating any shortages.
These examples demonstrate the crucial role of international trade in fostering resilience. The U.S. upheld its trade relationships despite overall trade volume taking a hit. Importers continued to engage with foreign partners and actively sought out new suppliers. Other studies have shown that international trade diversifies economies, making them more resilient to shocks.
This is because supply shocks are less correlated across economies, making it easier to respond to country-specific disruptions. In light of the evidence, arguments against trade that highlight the fragility of supply chains do not hold up. These arguments fueled protectionist sentiments during the first phase of deglobalization, but ultimately, their initial impact was short-lived.
Geopolitical Pressures and the Risk of Fragmentation
In February 2022, Russia’s invasion of Ukraine sent shockwaves through the international community, exposing the dangers of relying on a single country for imports. As gas supplies were cut off and energy prices skyrocketed, the vulnerability of depending on a critical input became painfully clear. It sparked concerns about what would happen if countries had to sever ties with China overnight. Policymakers realized that it was better to decouple immediately on their terms.
Around the same time, a new mindset emerged – one that viewed international welfare as a zero-sum game. The United States banned exporting advanced logic and memory chips and the machinery to produce them to China. While these measures may hinder China’s military capabilities, they also hinder civilian technological development, as these technologies have numerous civilian applications. The world shifted from a stance that encouraged trade, competition, and innovation in all countries to one where the most advanced economy sought to compete and foreclose. (source: CNN Business)
Predicting the future in this landscape is highly speculative, as it largely depends on policy choices. The deglobalization movement may reach its peak, limited to interventions in products with a credible dual use, while trade in other goods continues to thrive. However, there is also the possibility of a fragmented world, with rival camps and a new cold war between the U.S. and China and their respective allies. The consequences of the latter scenario could be severe.
In conclusion, trade wars can be economic battles between countries that aim to address unfair economic actions threatening a nation’s economic prosperity. While tariffs may be employed to achieve this, governments must consider the potential domino effect these actions could have on other nations and consumers worldwide.
The global economy is interconnected, and policies aimed at punishing one country could have a ripple effect on others. For example, the U.S. tariffs imposed on China in 2018 reportedly hurt U.S. consumers and businesses without effectively addressing the trade deficit. Therefore, governments must approach trade wars cautiously and consider their actions’ future implications.
As Kavan pointed out, the timing of the trade war couldn’t be worse. While trade wars are never beneficial, the current one is happening at a time when multiple other factors are also at play. Monetary stimulus is wearing off, oil prices are soaring, and political risks are rising.
The culmination of all these issues means that global growth is beginning to taper off, and the only real question is how much it will slow down. The ramifications of this scenario could be significant, and it will be worth watching how events unfold in the coming months.
