With all eyes on the US, it can be easy to forget that the global economy has endured a long history of trade wars, some of which arguably pulled the trigger for major economic downturns.
In recent times there has been intense focus on the trade war between the US and China. The US has been involved in several other trade disputes as well, including with steel exporting countries, Mexico and the EU.
History’s most famous trade war
The most famous trade war of all was in the 1930s. As US economic growth slowed at the end of the 1920s after its great expansion, US Congress put a 20 per cent tariff on virtually all imports coming into the US.
The theory was that the tariffs would help US companies and businesses and bring jobs back to the US, protecting the US economy. The problem? Other countries reacted by putting 20 per cent tariffs on imports to their countries as well.
The end result was a massive reduction in global trade. Many would argue that the ultimate consequence was The Great Depression.
When free trade flourished
After World War Two, the architecture of the global financial system was rebuilt and there was an increased focus on free trade as a way of helping reduce the risk of future wars.
At the time, the thinking was that if the world’s economies were more integrated and reliant on each other, they would be less likely to be drawn into conflicts.
We then moved through the subsequent decades which saw a general reduction in tariffs around the world. There was increasing recognition that tariffs, quotas on imports, subsidies and protectionism didn’t really work in the long term.
There was an acceptance also that it was better to allow countries to produce according to their costs of production. For example, if another country can produce cars cheaper than Australia, then Australia is better off focusing on producing things where it has a competitive advantage.
There have been a few other notable trade wars throughout history also. For example, in the 1970s President Nixon imposed some tariffs on US imports, and in the 1980s both the US and Japan experienced trade tensions. Further, tariffs were also put on Chinese steel imported into the US in 2002, but those tariffs were soon after abandoned. None of these trade skirmishes really had a lasting effect.
This current trade war we’re seeing between the US and China is a lot more significant. It’s probably the most significant trade war the world has seen since the 1930s. That is definitely something to be wary of, because while we’ve seen trade wars before, most of them have been relatively minor.
Current tensions are something to watch as the feeling among global economists is these wars don’t help, they actually just make things worse.
Subscribe to SMSF News to receive my latest articlesDr. Shane Oliver, Head of Investment Strategy and Chief Economist
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