Tariff war: we're not going back to the 1930s
President Trump's tariff measures are so surprising and baseless that they are creating chaos and confusion all on their own. Everyone is trying to understand what he wants, but it's hard to find any logic behind his objectives. Is this a measure for negotiation? Is it a measure to collect more indirect taxes and then lower direct taxes? Is the US president aware that his country has a very favorable services balance, precisely in the highest technological value activities?
How can historical experience shed light on this? The relevant past is the tariff war that erupted in the 1930s, when the US raised tariffs against the rest of the world, convinced that trade closures would allow them to increase domestic production, employment, and economic well-being and offset the stock market crash, but they found the opposite effect to what they expected. At that time, the US was a major exporter and enjoyed a very positive trade balance. It was a bad idea to attack the rest of the world with tariffs. Now, the increase in tariffs makes more sense, because the US currently has a negative trade balance—but we can't forget that the services balance is very positive.
In the 1930s, all countries had to respond to the rise in American tariffs by raising their own, creating a downward spiral in world trade that negatively affected the largest exporting countries. How long did this impact last? Months? No. Years? No, either. In many countries, the impact was permanent. Latin America and the Caribbean and the European colonies in Africa and Asia lost access to the richest markets and became impoverished forever. The economic globalization that had matured throughout the 19th and early 20th centuries was dismantled.
Could this permanent decline have been avoided? Yes. This was the objective of part of the Bretton Woods agreements of 1944: a return to free, barrier-free world trade. This goal excited the Latin American republics, which were the largest bloc of independent states in the world at the time. Cuba, worst affected by the tariff war, immediately offered Havana as the site of the international conference to create an International Trade Organization (ITO). The ITO was created on paper in 1947, but the outbreak of the Cold War in 1948 blocked its ratification in the US Congress. Can similar phenomena occur? Undoubtedly. We believe that the return to the free trade that existed before the Great Depression took more than 30 years just to eliminate the most burdensome elements of the mountain of bureaucratic red tape that had been created in the 1930s to hinder trade in a situation of enormous shortage of foreign currency to import. "Liberalizing" trade was mentioned when it referred only to eliminating the necessary permits for trade and reducing trade barriers in tariffs. It took thirty more years to reach the milestone, in 1995, of the creation of the World Trade Organization (WTO), which was the goal set in 1944. And to inaugurate a new era of very low tariffs—almost free trade—culminating with the entry of the 10 and 10 years. The president, who was trying to sabotage Donald Trump in his first presidency, now wants to annihilate his existence.
In other words: opening the Pandora's box of a trade war can set back generations of well-being for much of humanity—if not all. Does this mean that there should be no reaction to Trump's attack? No. A conciliatory and peacemaking attitude will not work when faced with a head of state who wants to win tariff and economic wars against the entire world. It will be inevitable to increase some tariffs—preferably intelligently, as Trump himself was surprised by when he launched his first trade war with China—with very well-measured and targeted increases. In the European case, this must involve punishing where they can harm Trump—products, areas—and, above all, where the US has the greatest surplus—digital services. These are a US export that excessively shies away from direct and indirect taxation by European states and the EU.
Seen from the European Union, which has more room for action than other parts of the world, it is necessary—it is essential—to act jointly. Acting separately when what we have is a common community tariff would be suicidal. It is better to move quickly to consolidate the freest trade spaces that exist in the world and intensify relations between states that are not the US. And wait for Trump to one day reverse the measures, not for 90 days but definitively, forced by the damage they cause to the US economy.
