Trade War: Two elephants in a porcelain shop (ESCAP Trade Insights: Issue No. 22)

Working paper9 Apr 2018

The imposition of import tariffs on steel and other metals is not new for the United States, but tying it to “national security” reasons is somewhat of a novelty. As the sector has been struggling with international competitiveness for many decades, there is scepticisms that an import duty of 25 per cent will make much difference. Especially as 65 per cent of steel and aluminium imported from seven major exporters into the United States got exempted from paying this duty.

China – accounting for only 3 per cent of imports of United States steel and 16 per cent of aluminium, not only did not get exempted but got additionally threatened with a hefty 25 per cent tariff on about $200 billion worth of exports (and counting). These added punitive tariffs – in addition to (erroneously) thinking that they will reduce bilateral China-US trade deficit - were to incentivize China to abandon what the United States and others see as unfair trade practices not the least in area of intellectual property protection. Instead, China decided to join in this tit-for-tat, targeting first only $3 billion and then raising it to over $50 billion of the most sensitive American exports to China. Both countries have also filed a complaint at the WTO leaving some hope for the WTO’s Dispute Settlement Mechanism to show (again) its worth.

So far, no tariffs were put into force, but the apprehension of that happening and escalating into a full-blown trade war is highest in the recent history (in Google search metric). ESCAP simulated impacts of such global trade war confirming that no party engaged in the war gains. However, there is a real danger of high collateral damage, not only in terms of economic losses to other countries, but also irreparable harm to the multilateral trade system. The key message coming from this is that there are no winners in trade wars.