Trade Wars and Real Wars

The world is rudely awakening to the dangers of President Donald Trump’s tariffs. Markets are correcting. Countries and industries are scrambling for exemptions. Economists now see greater downside than upside to growth projections for the U.S. economy this year. But the hazards could be even greater than anyone wants to admit. As protectionist sentiment rises, so does the risk of war.

The link between international commerce and peace has been apparent for so long that it is sometimes taken for granted. As the German philosopher Immanuel Kant wrote in his 1795 essay, Perpetual Peace, “The spirit of trade cannot coexist with war, and sooner or later this spirit dominates every people.”

That sounds like wide-eyed optimism, but the underlying logic is narrow self-interest. Nations are reluctant to jeopardize benefits from international commerce, especially when their leaders are bullish about future gains. Greater trade and investment cannot guarantee peace, but it raises the cost of going to war.

World War I appeared to toss that idea out and set history’s dustbin ablaze. Prior to the war, globalization was racing along. Between 1870 and 1914, trade rose to 8.2 percent of global gross domestic product. “The complexity of modern finance makes New York dependent on London, London upon Paris, Paris upon Berlin, to a greater degree than has ever yet been the case in history,” Norman Angell wrote in The Great Illusion, his 1910 opus that declared war obsolete.

But Germany’s aggression proves the point. German leaders believed the economic environment was turning against them, as the political scientist Dale Copeland has shown. With protectionist policies ascendant—in Britain and its colonies and in the United States, France, and Russia—Germany feared being squeezed out of global markets. These falling trade expectations made war a more attractive avenue for revising the status quo.

As Trump weighs additional protectionist measures, a similar gap is emerging between assumptions about globalization and expectations about trade.

Norman Angell might feel at home today in Silicon Valley or on Wall Street, where the prevailing assumption is that the world will only become more connected. But historically, globalization has been a roller coaster rather than a smooth sail. After World War I, it took more than six decades for global trade and investment flows to recover. Proponents of global connectivity would be wise to speak up sooner rather than later.

Equally troubling is that trade and investment expectations are starting to sour. Thirty percent of fund managers say a trade war poses the greatest risk to markets. A majority of American voters believe a trade war is likely. Sovereign investors are cutting their exposure to U.S. assets. Competitors and partners alike warn against Trump’s tariffs. Gone are any illusions that the president will not follow through on the spirit of his protectionist promises.

These are early and minor bumps in what could be a long and much more dramatic ride. Tit-for-tat trade actions could spiral out of the economic realm and into military confrontation. But the greater danger could be less direct and more insidious: a general weakening of economic incentives for keeping the peace among major powers. That raises the risk that miscalculation leads to escalation—in the South China Sea, the Korean peninsula, or elsewhere.

It is impossible to say whether conflict will ignite, let alone when and how. But it is easy to see how rising protectionism, actual and expected, can poison international relations. Any honest reckoning of Trump’s trade policies must take these risks into account.

The president is unlikely to abandon his current course entirely, but he could still limit collateral damage. Merely adding greater clarity to his policies, including their scope, duration, processes for exemptions, and conditions for removal, would help calm global fears. A narrower, more tailored approach would help limit backlash, particularly among U.S. allies and partners.

But to avoid the worst, the Trump administration needs to exercise more than caution. It urgently needs to offer the world a positive economic vision. Having withdrawn from the Trans-Pacific Partnership and opened renegotiations of existing trade deals, it is clear the administration stands against the status quo it inherited. What does it stand for?

A positive U.S. economic vision would help counter falling expectations. It would also push back against China’s attempts to fashion itself as a champion of global openness in the absence of U.S. leadership. That leadership is needed now more than ever. Before further darkening global sentiment, the United States needs to provide a light at the end of the tunnel.

Jonathan Hillman is a fellow with the Simon Chair in Political Economy at the Center for Strategic and International Studies in Washington, D.C., and a former policy adviser to the U.S. trade representative.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2018 by the Center for Strategic and International Studies. All rights reserved.

Jonathan E. Hillman