Trade wars: What do they mean? Why are they happening now? What are the costs?

Abstract

How should economists interpret current trade wars and the recent U.S. trade actions that have initiated them? In this paper we offer an interpretation of current U.S. trade actions that is at once more charitable and less forgiving than that typically offered by economic commentators. More charitable, because we argue that it is possible to see a logic to these actions: the United States is initiating a change from “rules-based” to “power-based” tariff bargaining and is selecting countries with which it runs bilateral trade deficits as the most suitable targets of its bargaining tariffs. Less forgiving, because the main costs of these trade tactics cannot be avoided even if they happen to “work” and deliver lower tariffs. Rather, we show that the main costs will arise from the use of the tactics themselves, and from the damage done by those tactics to the rules-based multilateral trading system and the longer-term interests of the United States and the rest of the world.

A World Trading System for the Twenty-First Century

“…In some sense, then, the industrialized countries …nd themselves in a position in the Doha Round not unlike the position that the United States tried very hard to avoid in the context of sequential bilateral tari¤ bargaining under the 1934 RTAA as described in chapter 2: new potential bargaining partners have arrived, but due to previous tari¤ bargains with each other the industrialized countries have not preserved su¢ cient bargaining power to engage in a substantial way with these new potential partners. Mattoo and Staiger (2020) argue that the 67 If the eventual arrival of the developing and emerging economies had been anticipated by the industrialized countries at the time that the latter were engaged in tari¤ negotiations, then the …ndings of Bagwell and Staiger (2010b) on bilateral sequential tari¤ bargaining in a GATT/WTO-like bargaining forum as an e¢ cient means of accommodating the arrival of new countries into the world trading system might apply. But it is the unanticipated arrival of the "latecomers" that makes achieving e¢ cient tari¤ bargaining outcomes in the GATT/WTO framework more di¢ cult.…”

A new president in the White House: implications for Canadian agricultural trade

“…Mattoo and Staiger (2019) contend that the United States switched from a rules‐based to a power‐based unilateral bargaining approach under the Trump administration to extract concessions from China as opposed to relying on the rules‐based multilateral system. Whether this approach will yield a substantive and sustained improvement in the US trading relationship with China remains to be seen.…”

“…History informs us, however, that the retreat from multilateralism by the United States, and the fact that the WTO's Appellate Body is currently frozen, are likely to have major impacts on agricultural trade for the foreseeable future. As Matto and Staiger (2019) point out, escalating tariffs are not politically easy to reverse, and there is the risk that US–China trade relations break down altogether. Further confounding the strained global trade policy environment is the coronavirus pandemic, which has promulgated a tug‐of‐war of polarizing policy responses in the United States and many other nations (Kerr, 2020; Orden, 2020): (i) A pro‐trade liberalization stance that seeks to minimize future disruption of supply chains, or (ii) re‐shoring and anti‐globalization sentiments to reduce dependence on imported products.…”

Withering Globalization? The Global Value Chain Effects of Trade Decoupling

“…Then, they discuss the short and long-term trade and macroeconomic implications of rising protectionism and evaluates its effects on the global economy and the euro area. Mattoo and Staiger (2019) look at the same issue from a game theory angle, considering the conflict as an episode of the U.S. Hegemony vs. China Hegemony phases, with trade conflict being a transition during which a power-based regime might look attractive to a dominant country. Then, this phase if followed by a relatively symmetric situation during which the (multilateral WTO) rules-based system is again the equilibrium regime.…”