Why trade wars are ultimately damaging for everyone
The restriction of industries, higher prices and a cost to growth – often for the sake of political point scoring. Trade wars, with their reactionary escalations of tariffs, are ultimately damaging. Not just for those on one side of the tensions, but for all countries involved. At most, a claimed triumph is tantamount to a Pyrrhic victory, incurring heavy losses along the way. Short-term gains for native industries do not necessarily provide solutions to their competitiveness.
The prevailing mercantilist ideas of the 18th century sought to use excise duties as a means of restricting imports and promoting exports. The belief was that imports constituted a loss of wealth, which was fixed, to other countries. Mercantilism was defended by concerns that liberalising trade would reduce Britain’s power and wealth.
That, however, was a false concern predicated on the supposition that trade was a zero sum game. Adam Smith discredited mercantilist ideas, arguing that free trade benefited both sides of the transaction, allowing global wealth to increase through specialisation and the production of goods and services.
Trade wars are often, at heart, a return to the discredited principles of mercantilist protectionism.
Whilst the heightened protectionism of trade wars can protect native industries from foreign competition, they result in excessive escalations of tariffs and the protection of firms provides no long-term solution to their inefficiencies. Governments should focus on tackling the problems these industries face, whilst also looking towards more efficient ones. And in trade wars, other industries get dragged in as tariffs become more expansive, posing a threat to firms and trade on both sides of the tensions.
Indeed, history has not looked fondly on the excessive protectionism and retaliation of trade wars. The US Smoot-Hawley Tariff Act is regarded by many as contributing to the decline in world trade in the 1930s, with 25 countries retaliating with their own tariffs. When the newly unified Italy ended its trade agreement with France in 1886 and raised tariffs to about 60%, “both countries experienced dislocation in their export markets and sources of supply.”
Trade wars frequently become embroiled in a political contest, neglecting the benefits of free trade to producers, consumers and aggregate growth. During the escalation of political tensions, disputes become a contest of who has lost out the least.
As former Prime Minister Neville Chamberlain said, “In war, whichever side may call itself the victor, there are no winners, but all are losers.”
Kaamil Kaba is the winner of our Wilson’s School essay competition, held following an Adam Smith Institute economics conference held at the school earlier this month.