THE FIRST GLOBAL TRADE WAR

The threat of the US imposing trade tariffs on supplies from Canada, Mexico, the European Union, and China is a matter of concern and could potentially lead to global trade wars. Furthermore, President Donald Trump's assertions that his country is well-positioned to prevail in upcoming trade conflicts have contributed to strained international relations.

In this context, Turkish President Recep Tayyip Erdogan, during a meeting on promoting the national employment strategy, observed that the contemporary international system is undergoing a challenging period. Geopolitical competition has reached a new level, and trade wars among key players are set to intensify.

The Tariff Stick

In regard to the present policy of the US, the American leader believes that the implementation of tariff measures will assist in the reduction of the smuggling of fentanyl and illegal migrants across the northern and southern borders of the US. To this end, he has decided to introduce unprecedented protectionist measures, despite the fact that the American economy is experiencing dynamic growth and is operating under conditions of full employment.

Trump has also set the goal of closing the significant trade balance deficit of the US with the rest of the world, amounting to $1 trillion. His team asserts that the introduction of tariffs will encourage companies to repatriate investments and jobs back to the US. In previous years, due to cheaper labour, electricity, and other factors, American businesses relocated their production facilities to China, Taiwan, and other countries.

Critics, however, have expressed concerns that this approach could lead to a series of unintended consequences, including higher prices, reduced economic growth, job losses, and disruptions to global supply chains. They argue that tariffs are not an effective solution to address the trade deficits caused by America's excessive borrowing and consumption patterns. Nevertheless, Trump's team remains confident that the introduction of trade tariffs will enhance the economic well-being of Americans, with the president even proposing the establishment of a Revenue Service to collect the generated tariffs. The American leader has also indicated his intention to require foreign companies to pay special taxes to operate in the American market, stating that this will not harm American consumers. However, the complexity of the situation should not be underestimated. Tariffs are a tax paid by importers at the border, and if they increase, importers face a choice: pass the price increase onto consumers or accept reduced profits.

Most economists believe that price hikes due to widespread tariffs will immediately affect consumer inflation indicators. Although the president has promised to offset their impact by reducing taxes in other areas, there are no signs yet that this will happen in the foreseeable future.

As for potential tariff revenue, Trump often refers to the experience of the late 19th century when tariffs accounted for more than half of federal revenues in the US. However, this was before the introduction of income tax, which now supports the government and serves as one of the main sources of budget revenue.

Hitting Canada, but Aiming at China

During his first term, Trump imposed 25% tariffs on imported steel and 10% on aluminium. In response, the European Union imposed tariffs on Harley Davidson motorcycles, Levi's jeans, and bourbon.

In retaliation, the American leader threatened to impose tariffs on European car imports, though this never materialised. Eventually, both sides suspended the tariffs. The ceasefire with the EU expires at the end of March this year. Even if Trump does not apply tariffs to Europe now, it does not mean the EU will avoid a trade dispute with Washington later.

One of the most striking precedents of tough, unilateral actions by Washington in recent history was the so-called Nixon Shock. This refers to a series of economic reforms implemented by US President Richard Nixon in 1971. He ordered a 90-day freeze on wages and prices and introduced a 10% import tax. However, the most significant measure was the unilateral decision by the US to abandon the dollar's peg to gold. This move forced US trading partners to revalue their currencies as well.

On one hand, Nixon’s actions are considered a political success, but on the other, an economic failure. The import tax was repealed within a few months. As a result, the US economy subsequently struggled for years with stagflation—a combination of low growth and high inflation. It was only overcome in the 1980s through the tight monetary policy of Federal Reserve Chairman Paul Volcker.

It is well known that one of the primary, if not the main, targets of tariff restrictions imposed by Washington has been and remains China. The growing economic power of this country, considered the key geopolitical competitor of the US, poses what some see as an existential threat to the latter.

Although Trump merely threatened to impose 10% tariffs on China, it is believed that the tariff restrictions still looming over Canada and Mexico are indirectly aimed at Beijing as well.

All Against All

Under the USMCA trade agreement, Chinese companies, such as electric vehicle manufacturers, can enjoy duty-free access to the US market if they locate production in North America.

In recent years, a bipartisan consensus has formed in Washington on the need to counter China and its economic model, which has created massive excess industrial capacity and flooded global markets with its goods. However, after taking office, Trump toned down his rhetoric, stating that he simply wants "fair" trade relations with China.

Many are now watching to see whether the American leader will soften his stance towards allies, particularly European countries, if they agree to join US efforts to prevent China’s dominance in the global economic system. For Brussels, this could serve as a kind of lifeline to somehow resolve current tensions with Washington.

But this is a very weak consolation, considering that the US president has intensified his rhetoric towards his European partners, stating that "the European Union has gone too far" regarding the trade deficit. Nevertheless, Brussels is desperately trying to engage in dialogue with the American administration, offering to purchase more liquefied natural gas or weapons from the US. However, hopes for a positive outcome are slim.

Last time, Brussels responded to Trump’s tariffs on steel and aluminium with similar measures against American motorcycles, jeans, and bourbon. Today, it could do at least the same.

However, experts fear that this may not work. Additionally, the process of negotiating decisions and reaching consensus could be too slow, as not everyone in the European Union supports a hard-line stance towards the US.

For instance, Hungarian Prime Minister Viktor Orban stated on social media that the European Union faces difficult months ahead, and bureaucrats in Brussels will have a tough time. “We need to reach an agreement, a deal, to preserve our economic relations with the United States,” the politician concluded.

It should be noted that Trump is applying powers for the first time under the 1977 International Emergency Economic Powers Act (IEEPA), which until now had only been used by Joe Biden to impose sanctions against Russia.

IEEPA has not yet been invoked to justify tariffs. It is quite possible that major industrial and financial groups, which stand to suffer colossal financial losses as a result, may challenge this decision in court. However, it is unlikely that judges will immediately issue a ban on the application of tariffs. Any legal proceedings will likely drag on.

Can the War Be Stopped?

The US Congress could also halt Trump’s trade wars. In addition to confirming the questionable justification that fentanyl and illegal immigration create an economic emergency, the legislative body previously granted the president broad authority over trade policy. Such powers were first bestowed upon Franklin D. Roosevelt in 1934. Congress, if it deems necessary, can revoke these powers from the president. But since both the Senate and the House of Representatives are under Republican control, there would need to be compelling reasons in the form of negative consequences for the American economy.

There is also the World Trade Organisation—the global body established 30 years ago to act as an arbiter in trade disputes. China has already filed a complaint with the WTO regarding Washington’s actions. However, it currently cannot effectively perform its role, as Trump, and previously Biden, have blocked the appointment of judges to its appellate body.

The organisation can still form panels to draft reports on cases, but these reports can no longer be sent to the appellate body for a legally binding decision.

Moreover, there are no rules for Trump. So unless there is a strong political or judicial reaction within the United States to his trade war policies, it is unlikely anything will stop the American leader.