Allison Carnegie
President Donald Trump may have backed off, for now, from the sweeping tariffs he proposed placing on almost every country in the world. But he is still upending global trade. Trump has established baseline ten percent tariffs on most imports. He has made those levies higher for a variety of specific goods, including steel. And he slapped 145 percent tariffs on imports from China, the world’s largest manufacturer, although he has now agreed to cut this rate to 30 percent. The result has been a raft of trade wars between Washington and other governments, Beijing foremost among them.
Trump’s disruptions to the global economy are serious, and they may feel novel. But today’s situation is hardly without precedent. One does not have to look especially far back to see what the president’s tariffs might do to the world. The problems the global economy now faces echo some that existed before the 1995 creation of the World Trade Organization and others that existed even before the WTO’s predecessor, the 1947 General Agreement on Tariffs and Trade (GATT). Until those bodies helped standardize commerce, countries frequently used trade to extract concessions from one another. They created and exploited what economists call “hold-up problems”: when one state or firm makes an investment in another in which profits depend on the continuation of the relationship. For example, one country could build oil infrastructure in another country that the supplier alone can service or operate. Once such deals are concluded, powerful countries can coerce their partners simply by threatening to change the terms of the agreement.
In the near term, countries can benefit from wielding trade as a cudgel. But in the long term, trade wars leave almost everyone worse off. When countries frequently use economic leverage to secure concessions from vulnerable partners, investment and economic growth go down. Political instability, meanwhile, goes up. States that chafe at economic coercion sometimes turn to their militaries in order to fight back. Countries that once cooperated because of commercial ties turn into competitors. Even close allies drift apart. Trump may think his tariff regime will make the United States richer, safer, and stronger. But history suggests it will do just the opposite.
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