The Great Trade War : THE FACTS

A world trade war: The mere possibility sends shivers down the spines of economists and business leaders around the globe, who remember all too well that the last trade war accompanied the Great Depression of the 1930s.

Yet the risk may be greater than at any time since then.

“A trade war is totally out of the question except for the fact that it has a good chance of happening,” says Bill Brock, the U.S. trade representative a decade ago and now a Washington c1869509493things.”

Some of those little things may already be happening.

The new Clinton Administration is regularly threatening to close some U.S. markets to European goods if the European Community does not dismantle one trade barrier or another. The mounting 1429099310United States restrict Japanese imports unless Tokyo opens its markets. The EC, which also runs a huge trade deficit with Japan, has already tightened its limits on Japanese car imports.

Other dangers loom. Negotiations aimed at liberalizing world trade have been stalled for more than two years and could collapse if agreement is not reached by the end of this year. The U.S. Congress is moving to reinstate the President’s power to act against nations that run heavy trade surpluses with the United States. The industrial world could be moving toward three trade blocs: the EC, East Asia and--if the North American Free Trade Agreement (NAFTA) wins congressional ratification--North America.

“A trade war,” warns Jim Rollo, director of international economics for London’s Royal Institute of International Affairs, “is something that will creep up on us.”

U.S. Trade Representative Mickey Kantor, who is viewed by many in the industrial world as dangerously protectionist, insists that the last thing the United States wants is a trade war. His frequent threats of closing U.S. markets, he says, are meant merely to pry open foreign markets to U.S. goods.

But a senior official in Kantor’s office concedes: “We’re at a pivotal point. If things don’t get better, they could go the other way. The stakes are pretty high.”

A minority of economists find the prospect of a trade war less than alarming. Jeff Faux, president of the Washington-based Economic Policy Institute, says free trade means jobs go to low-paid foreigners instead of better-paid Americans. Manufacturers feeling hamstrung by U.S. environmental regulations move their production facilities overseas. Competition from abroad has all but wiped out some U.S. industries (consumer electronics) and devastated others (cars, steel, textiles).

“We just don’t think that the world’s economy and the fate of Western civilization ride on whether we have more trade or less trade,” Faux says.

In the view of most analysts, however, trade wars have nothing but losers. True, some manufacturers profit temporarily because their domestic markets are shielded from foreign competition. But even these manufacturers lose out in the long run: They become flabby and unable to survive fair competition from abroad.

“The early stages tend to be, on balance, politically pleasant,” says Gary Hufbauer, an analyst with the Washington-based Center for International Economics. “If we restrain imports of auto parts, there will be companies here finding sales picking up. . . . But the inefficiencies and high costs come back to haunt you.”

In contrast, firms that rely on foreign markets suffocate during a trade war. The United States exported $448-billion worth of goods last year; economists estimate that as many as 13 million Americans owed their jobs to international trade in goods. And that does not count the $178 billion in exports of such services as movies, telecommunications, shipping and banking.

The Paris-based Center for Forecasting and International Information has analyzed the probable global consequences of a severe trade war. It assumed that total world trade would decline by nearly 20%--a substantial drop, but still far short of the two-thirds plunge during the Great Depression.

The center’s analysts concluded that world economic output would be 15% lower in the year 2000 than it would be without a trade war. The countries that rely most heavily on trade would be hit the hardest: 23% less economic output in industrial Asia, 13% less in Europe and 7% in the United States.

“In reality,” the center found, “all countries are losers at this game.”

The London Business School assessed a relatively modest trade war between only the United States and Europe--one in which each side raised tariffs on the other’s goods by 10 percentage points. The result, it found, would be a 1% reduction in economic output--enough to make the difference between slow economic growth and recession--and that prices would be almost 2% higher.

“These estimates are probably at the lower limit of likely effects,” says Rollo. A serious trade war, he says, is likely to mean larger tariff increases and some import quotas, and it will probably involve Japan as well as the United States and Europe.

The mere threat of a trade war, says Brian Mullaney, chief economist with the Morgan Stanley International investment house in London, has already contributed to Europe’s recession by undermining business confidence.

And beyond the economic fallout from a trade war, there would also be political damage as trust evaporated between the world’s richest countries.

Carla Anderson Hills, former President George Bush’s chief trade negotiator, says it would become almost impossible to put together the kind of international coalition crafted by Bush to fight Iraq after it occupied neighboring Kuwait in 1990.

Hills warns that industrial countries would also probably close their markets to Eastern Europe and the newly independent nations carved from the former Soviet Union. In that event, she says, “it seems predictable that these states . . . will not be able to deliver on the promises they made to their people, and they will be replaced by more strident, less sensible governments.”

It is the United States that usually gets the blame for starting the last world trade war, in the Great Depression. The instrument was the infamous Smoot-Hawley Tariff Act of 1930, which sent tariffs soaring on most imports: hand tools (45%); china and porcelain (60%); champagne ($6 per gallon). A 90% tariff nearly doubled the cost of imported dolls.

Smoot-Hawley triggered a tidal wave of retaliation. Canada, hit hard by new U.S. tariffs on food and timber products, raised its own tariffs on U.S. goods. Italy, stung by Smoot-Hawley tariffs on hats and olive oil, acted to block U.S. automobiles. Switzerland, its watch manufacturers objecting to the new U.S. tariffs, boycotted U.S. exports. More reprisals came from Mexico, Britain, Germany, France, Spain, Japan, Australia and New Zealand, among others.

In the aftermath of Smoot-Hawley, total world trade plunged by two-thirds, from about $3 billion a month early in 1929 to about $1 billion in 1932 and 1933.

Did the collapse of world trade cause the Depression? Or did the Depression cause the collapse of world trade? Economists are still debating this chicken-and-egg conundrum. In fact, the answer is probably yes to both questions--the Depression (with a lot of help from Smoot-Hawley) forced world trade down, and the collapse of trade in turn aggravated the Depression.

After World War II, the world’s top trading nations set up the Geneva-based General Agreement on Tariffs and Trade (GATT) to set and enforce rules governing international trade. Six rounds of negotiations under GATT auspices reduced average global tariffs on manufactured goods from 40% in 1950 to 4% today. Simultaneously, the volume of world trade exploded.

Now 115 nations are participating in the seventh round of GATT negotiations, known as the Uruguay Round because it was launched in that country’s resort city of Punta del Este in 1986. The Uruguay Round’s agenda, the GATT’s most ambitious ever, includes tightening rules on such sensitive products as farm goods and textiles, where industrial countries are trying desperately to protect domestic workers from low-cost competition from abroad.

The Uruguay Round would also extend the GATT’s reach to trade in services and in intellectual property: such things as patents on pharmaceuticals, trademarks on blue jeans and copyrights on computer programs, all of which are being pirated abroad with no compensation for their original holders.

Ironically, if there is to be a Great Trade War of 1994, the Uruguay Round may be one of the causes. If so, the turning point came in December of 1990, when trade negotiators from all over the world converged on Brussels for what was supposed to be the final week of talks.

Instead, the talks broke down when the EC refused to bow to U.S. demands that member countries dismantle their agricultural subsidies, which, according to U.S. negotiators, give European farmers unfair advantage in global competition.

President Clinton made one last effort last month when he asked for congressional authorization to bring home a deal by Dec. 15, 1993. If negotiators miss the December deadline, that could spell the end of the Uruguay Round.

If it happens, its demise could hardly come at a worse time. With the Cold War over, commercial rivalries have replaced military ones as the primary source of competition between nations. Deep insecurity--economic, not military--plagues the world’s economic superpowers. Huge trade imbalances--Japan runs huge surpluses at the expense of the United States and Europe--only make matters worse.

As long as the Uruguay Round is alive, the major trading nations have a stake in maintaining at least the semblance of free trade. If the Uruguay Round dies, they might well fall back to protecting individual industries.

One such industry might be semiconductors. Japanese firms lead the world in the production of those tiny silicon chips, the basic components of computers. American manufacturers protest that the competition is unfair, that Japan excludes foreign producers from its home market.

Under U.S. pressure, Japan has agreed to buy 20% of its computer chips abroad, a goal it achieved by the end of 1992.

But what if it announces early next year that imports slipped back to, say, 15% in 1993. . . ?

History textbooks record that, with congressional elections just ahead, Congress and Clinton decided it was time to get tough. Congress resurrected the “Super 301” provision of U.S. trade law, which had expired in 1990. Under “Super 301,” the President could retaliate against any trading partner with a large trade surplus with the United States, whether or not the surplus resulted from unfair trading practices.

President Bush did not make much use of his “Super 301” authority even when he had it. Clinton, in contrast, promptly imposed punitive tariffs on imports not only from Japan, which ran a $46-billion surplus with the United States in 1992, but also from China ($18 billion) and Taiwan ($9 billion). And lest he be accused of picking on the Japanese, he also slapped heavy tariffs on the Airbus, a passenger jet produced by a consortium of European manufacturers with substantial government subsidies.

The rest of the world was in no mood to turn the other cheek. In Japan, economic growth was its slowest since the 1973 Arab oil shock. Germany, crippled by the costs of reunification, was in the second year of deep recession. Germany’s high interest rates--the price of fighting inflation generated by the immediate post-reunification boom--had dragged much of the rest of continental Western Europe into recession.

More than that, leaders of most industrial nations were weak and unpopular: Japanese Prime Minister Kiichi Miyazawa, crippled by a series of political financing scandals; German Chancellor Helmut Kohl, blamed by many western Germans for the high price of absorbing East Germany; French President Francois Mitterrand, aging and worn out after 13 years in office; British Prime Minister John Major, faulted for mismanaging the British economy.

So Japan responded to Clinton’s tariffs by accelerating the formation of an Asian trade bloc to rival the U.S.-Canada-Mexico bloc established by the North American Free Trade Agreement.

The EC retaliated with regulations designed to prevent U.S. financial institutions from doing business in Europe.

Those regulations affected Japanese as well as American institutions in Europe. The Japanese fought back by closing their markets to European foods; Europe replied with sharply reduced quotas for Japanese cars.

The Trade War of 1994 had begun.