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The danger of a global trade war

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"Trade wars are good" - Donald Trump

Though Donald Trump's tweets often seem mere clowning, the decrees he signed imposing import duties on steel and aluminium, and subsequent threats of further punitive duties on Chinese imports, do have to be taken seriously.

The US president has used a loophole that allows him to bypass Congress in an attempt evade international trade agreements and impose "protective tariffs". He is using Section 232 of the Trade Expansion Act (1962), which provides for action based on a threat to national security. However, the 25 percent import duties on steel and 10 percent on aluminium are in reality punitive duties which violate the rules of the World Trade Organisation, WTO.

Trump had anyway already made it clear, if there were any doubt, that he does not care about international trade agreements or the threat of criminal proceedings at the WTO. When the EU Commission threatened to take countermeasures of equal value; 25 percent duties on whisky, peanut butter, jeans, etc. with a total import value of €2.8 billion, in line with WTO regulations, Trump reacted by threatening to increase import duties on cars from the EU, in a tit for tat move. Referring to the $US 800 billion trade deficit, Trump explained, again via Twitter, that "trade wars are good and easy to win".

World Press in Turmoil

On March 10 2018 The Economist cover page cartooned Trump as a hand grenade with the headline "The Threat to World Trade". The London weekly has been the "central organ" of free trade advocacy since its foundation in 1843. The lead article was headlined "The rule-based system is in danger" and drew parallels with US President Herbert Hoover’s 1930 Smoot-Hawley Tariff Act, under which the US adopted protectionism, and recorded how this exacerbated the1929 Wall Street Clash into a global depression.

In the Economist's view, whilst the tariffs would support the US steel industry in the short term, they would increase the price of intermediate products for steel processing companies, which are among the much more productive sectors of the US economy. This was also the experience when President George W Bush attempted to introduce tariffs for the steel sector in 2005. In the end, the pressure from other industries proved greater and the tariffs were abolished. This time too, the major trade associations, above all the powerful US Chamber of Commerce, have taken a stand against the increase in duties by the president with a protest declaration on March 18. This was then echoed by a large number of members of Congress, including members of the Republican party.

The resignation of the chief economic advisor to the White House, Gary Cohn, certainly signaled a conflict with the free trade faction in the US bourgeoisie. However, Lawrence A. "Larry" Kudlow (formerly chief economist of investment bankers Bear Sterns) and also from the business wing of the Republicans, was immediately appointed to be his successor, although he, too, had criticised the tariff increases shortly before as "hidden tax increases", which would cost 5 million jobs. This could indicate that the US is ultimately not really launching a trade war, but a roughhouse renegotiation of world trade conditions into which Trump is now sending his economic bulldogs like Robert Lighthizer (US Trade Representative) and Wilbur Ross (US Commerce Secretary).

Of course, the USA is anything but a "victim" of the existing trading system. Tariffs have played less and less of a role in international trade since the 1990s, the global average fell from 13.1percent in 1995 to 7.5percent today. The US collects an average 3.2 percent duty on EU goods and the EU 3.9 percent on US goods. Overall, the customs duties have had only a marginal effect on the US trade balance. The decisive factor here is the price problem, that is, the productivity problem of certain sectors of US industry.

The US trade deficit is, in any case, massively offset by the strength of US technology and financial capital. Thus, despite the enormous trade deficit, the dollar has not declined significantly. This in turn reinforces the export weakness of manufacturing industry in the USA. In addition, US corporations have outsourced significant areas of their production either to the NAFTA states, Canada and Mexico, or to China. For example, 40 percent of imports of electronic goods into the USA are actually products of US-Chinese joint ventures. Obviously, large parts of US capital have benefited greatly from this international division of labour.

China’s Competition
However, the shocks in the wake of the financial crisis and the major investment programmes that followed it have led to a number of changes in China's role. The country has climbed substantially up the value-added chains of the international division of labour. Now China itself employs cheap production in dependent countries and has accumulated technical know-how for its own high-tech industries. Its corporations have long since been able to compete with those of other great powers in all areas. In particular, the USA, which continues to be at the top of the international value chain in terms of high-tech expertise and financial capital, is nonetheless feeling the challenge from China. Those parts of US capital that share these fears would have good reason to back Trump's actions.

Trump's announcement of tariffs on steel and aluminum on March 8 was just a foretaste of the main show, which took place on March 22 at the Oval Office: the announcement of punitive tariffs of $60 billion against China. By way of comparison, the volume of EU exports affected by steel tariffs was around 5 billion. Interestingly, Lighthizer announced on the same day in the relevant Congress committee, that the EU, together with the North American Free Trade Area (NAFTA) states, plus Australia, Argentina, Brazil and South Korea, Japan was somehow forgotten, would initially be exempted from tariffs for steel and aluminium (until the beginning of May).

All this shows that an intensified reorganisation of the imperialist world order is taking place in the context of the trade conflict. At the beginning of March, all free trade enthusiasts, including those within the EU and even European Social Democrats, called for immediate rejection and the opening of talks with China and other powers for a combined response. Canada was the first to fall over, ready to compromise in the NAFTA negotiations, and then to be the first to be exempted from customs duties.

The EU remained opposed and EU Trade Commissioner Cecilia Malmström and Federal Economics Minister Peter Altmaier worked on Lighthizer and Ross. Shortly before the provisional agreement, CDU politician Jürgen Hardt (Coordinator for Transatlantic Relations at the Federal Foreign Office) said: "Of course, we will also tell the Americans that we could take joint action against unfair trade practices from China" (Frankfurter Allgemeine Zeitung, March 17). It is in the EU's interest to seek an agreement with the US rather than to side with China. This seems to have happened now and the list of countries with exceptions shows how isolated China is in the face of the much more massive attack of 22 March. However, the last word has certainly not been spoken, the exceptions only apply until 1 May and the massive US demands on the EU could lead to a change of fronts at any time.

In fact, because of the size of its domestic economy, the US is much less dependent on exports than any of its major competitors. The current slump in world trade is hitting all those whose economies are more dependent on exports - not only China, but also Germany. The Managing Director of DIHT (Industrie- und Handelskammertag) Martin Wansleben explained: "Today, we are all a bit China" (ntv, 23.3.).

The fear that a trade war between the USA and China could lead to an overall slump in world trade and thus to a problem for German exports is obvious. In the 1930s, the tariff war and the retreat into rival trading blocks, led to a halving of world trade within only 3 years. Even today, IMF economists are considering scenarios that envisage a break in the recovery cycle of the global economy that only began in 2017. Growth rates are already seen to be as much as 1 percent lower than possible or even on the way back into recession. It is therefore not surprising that, even in the USA, Trump's announcement on March 22 immediately led to a crash of more than 700 points in the Dow Jones stock market index.

Of course, much will now depend on China's reaction. There is no doubt that it has a problem with its oversized steel sector, which is flooding the world with cheap steel. Under Xi Jinping, it has been official policy to reduce over capacity both for reasons of global policy and for environmental protection. However, as with many other sectors, the ability of Beijing to enforce its policy on reluctant provincial authorities is not guaranteed. Questions of patent rights, and allegedly illegal technology transfer also affect core elements of the new economic plan. In the wake of the recent National People's Congress, which endorsed his pre-eminence, Xi may feel confident that he can go some way to meeting US demands in areas such as financial services, banking and capital investment, which fit in with his own reform strategy.

The first statements from China in response to Trump's measures were very patriotic and sounded almost like a mobilisation for war. There are certainly counter-measures that China could take that could give Trump pause for thought. These include, for example, tariffs on soya imports from the US, worth $12 billion annually, which would seriously hit his voters in soya producing states. However, to make that stick, would need the cooperation of Brazil as an alternative source of the soya China will still need. Less problematically, a limit on the export of rare earths to the USA would have a severe impact on high-tech industry there. Lastly, with reduced access to the US market, China could be expected to turn more aggressively to other markets, including the EU. This can already be seen with regard to steel exports which could have a far more serious impact on the European steel industry than Trump's tariffs. All in all, the prospect of a period of turbulent trade conflicts and rifts in the global economy is now much more likely.

A look into history

Capitalism in its history has known several different world trade orders. It was the British bourgeoisie, for example, which, from the 1840s, imposed a worldwide free trade regime dominated by British industry. For example, it struck a series of trade agreements with European countries, the most far reaching of which was the Cobden-Chevalier Treaty of 1860 with France, that substantially reduced tariffs. Finally, a mechanism was found with the 1879 gold standard that "automatically" forced governments to adjust to trade flows because trade balance deficits automatically led to currency devaluation as a result of gold outflows.

In the pre-imperialist era, that is, before the late 1890s, it was, however, still possible to establish individual islands of protectionism. Competitors to British capital emerged in Germany, the US and Japan and were able to grow certain sectors of their industries and agriculture behind protective tariffs, while remaining within the general framework of world free trade, guaranteed by the UK.

The contradictions within the imperialist order finally burst to the surface in the First World War, which caused world free trade and the gold standard to collapse for several years. Britain's desperate attempts to reintroduce the gold standard in 1925 could not overcome the fact that it was no longer strong enough in relation to the other powers, in particular the USA, to act as the organising centre of world trade. With the economic crisis, both the gold standard and the world trading system collapsed in the 1930s.

After the Second World War, a much less open system was established with the Bretton-Woods agreement. Only the dollar, as the leading currency, still had a link to gold. The tariff level was much higher than in the British period and the system as a whole was driven by the dominance of US capital exports. However, the narrow framework and the clear hegemony of one imperialist power made possible the capitalist boom period that lasted until the collapse of Bretton Woods in the early 1970s.

After the crises of the 1970s and 1980s, various regimes; freely floating currencies, fixed exchange rates, trade restrictions, trade liberalisations, alternated and new competitors for US capital emerged. It was not until the 1990s that a new system of world trade became firmly established once more. The currency system is now finally dominated by "the markets", especially those for foreign exchange, derivatives and government bonds, and the deregulation of internal markets allows private capital exports on an unprecedented scale.

Today, the production chains of the major capitals are also international in scale, which means that a considerable part of world trade consists of trade in intermediates. Central to the relative and, as it turned out, quite temporary, stabilisation of the globalisation period, however, was China's rise to become the workshop of the world, and its exception from the world monetary system, which allowed the yuan to be kept at an artificially low value. Dollar purchases by the Chinese central bank, cheap Chinese goods and a debt economy backed by US assets to finance US imports were the engines of the globalisation upturn.

Crisis 2008

This growth model was obviously shaken by the economic crisis after 2008, but the policy of cheap money through "Quantitative Easing" and large government investment programmes, especially in China, made it possible for it to continue for a while - albeit against the backdrop of a stagnating global economic trend. Overall, however, the outcome has been a substantial strengthening of China which, in the long term, will certainly strive for a different role from that it played in the period of globalisation.

Obviously, we are once again facing a reordering struggle between the capitalist powers and this will not end with a few tariff disputes. Rather, turbulent times similar to those in the 1970s and 1980s are to be expected. Even then, apparent stabilisations were achieved through a return to old rules, for example, the Plaza-Louvre agreement to fix exchange rates. Depending on the severity of the conflicts, however, more serious slumps such as that of the early 1930s are also possible. Even if there is a change of government in the USA or a change of majority in the next congressional elections, the friction with China will not disappear and the measures of any US government will continue to shake the world market order in the near future.

The USA and its president may regard their current course of confrontation with their biggest trading partners and rivals as a means of improving their own position on the world market, forcing their competitors to make concessions and thereby regaining the lost stability of globalisation, but occasional flashes of sheet lightning in the sky of the world economy could easily portend a hurricane. A trade war may not be desirable, but the confrontation has its own logic, which can and must lead to an aggravation of the situation in the coming years.

What about the workers?

In this situation, it is all the more important that the working class does not allow itself to be dragged along behind "its" ruling class. Trump's promises to wage earners in the US steel industry will in any case turn out to be hot air. At best, they can hope for a few jobs, temporarily, but with far worse working conditions and at lower wages. Overall, all governments will try to pass the cost of a trade war on to wage earners in the form of higher prices, whether through higher imports or by presenting the purchase of expensive domestic products as a patriotic duty.

Any support for such a policy could only lead to the nationalistic division of the workers in different countries. Any involvement of trade unions, social democratic or left wing parties in protective tariff policies must be strongly condemned - just as the deceit of capitalist free trade and its empty promises must be denounced.

Any national solidarity behind government trade policies; any act of "retribution" with its own protective tariffs must be firmly rejected. In the final analysis, trade wars never remain purely economic matters and they serve not only to defend or conquer positions on the world market, but also in the imperialist world order.

They are part of a struggle to redivide the world's markets and natural resources that is now developing between the old and new great powers. Only if the working class recognises that its main enemy is its "own" imperialist bourgeoisie and not their "trade rivals", only if it does not sacrifice the class struggle in the "national" interest, can the intensification of competition, a world trade war and its political consequences, including world war, be prevented by the international class struggle, by the socialist world revolution.

Translated for Red Flag, May 2018