Donald Trump says trade wars are easy to win. Are they?

BERLIN — Donald Trump makes light of trade wars, claiming they are easy to win. We’re about to find out if he’s right.

The U.S. president has imposed tariffs of 10 percent on China from Tuesday, while Mexico and Canada won last-minute stays of execution on 25 percent tariffs. He’s also threatening to hit the European Union — a major exporter of cars, medicines and food to the United States.

Trump says he wants to use the tariff weapon to halt the flow of fentanyl and illegal migrants across the northern and southern borders of the United States. To do so he has invoked emergency powers — even though the U.S. economy is growing strongly and is at full employment.

He also wants to close the $1 trillion U.S. trade deficit with the rest of the world. Team Trump argues that throwing up a tariff wall will force companies to move investment and jobs back to the U.S. — think of all those silicon chips now made in Taiwan or iPhones made in China.

But critics warn that Trump’s trade war will result in higher prices, lower growth, lost jobs and disrupted supply chains — both at home and abroad. They also argue that tariffs are the wrong tool to fix a trade deficit caused by America’s borrowing and consumption habits.

Here’s what Trump’s trade war is all about:

What’s a trade war?

First up, a trade war isn’t an actual war: It’s a conflict that results when one side feels that a trading relationship is unfair. Let’s say you flood my market with cheap steel, at prices below the cost of production. Companies in my country are going to the wall. They are laying off workers. My voters. That’s dumping and, under the rules of global trade, I can retaliate by imposing tariffs on your steel.

For a trade conflict like this to turn into a trade war, things need to escalate. And that’s what is happening here: Trump is still threatening to hit America’s closest trading partners with tariffs on pretty much everything. That means we could be about to embark on the biggest trade war since the 1930s.

How do tariffs work?

Trump claims that his new tariffs will make Americans rich — he’s even promised to set up a new External Revenue Service to collect all the revenues that they throw off. He also says foreign companies will pay them and that they won’t hurt U.S. consumers.

That’s not how they work, however. Tariffs are a tax that is paid by the importer at the border. If they go up, the importer faces a choice — to pass on the price increase to the consumer, or to accept a squeeze on their profit margins.

Price increases from Trump’s across-the-board tariffs would show up immediately in consumer inflation, economists say. And although he has promised to offset their impact with tax cuts elsewhere, there is no sign of that happening yet.

As for the potential revenue from tariffs, Trump likes to hark back to the late 19th century, when tariffs accounted for over half of U.S. federal revenues. But that was before income tax — which today supports a government much larger in relation to the overall economy. There is just no way that tariff revenues can pay for a modern state.

When was the last trade war?

In Trump’s first term. He imposed 25 percent duties on steel and 10 percent on aluminum in 2018 — while the European Union responded by slapping $6 billion in tariffs on Harley Davidson motorbikes, Levi’s jeans and bourbon.

Trump threatened to escalate by hitting imports of European cars — but it never came to that. Eventually, the tariffs were suspended by both sides. The EU truce expires at the end of March, meaning that even if Trump doesn’t hit Europe with tariffs now, their trade dispute could still get out of hand.

The clearest precedent is likely the so-called Nixon shock of 1971. The starting point was comparable to today: The costs of the Vietnam War and of the Great Society policies of the 1960s had tipped the United States from surplus into deficit.

In an attempt to restore the balance, President Richard Nixon abolished the gold standard — forcing the trading partners of the U.S. to revalue their currencies. He ordered a 90-day freeze on wages and prices. And he imposed a 10 percent import tax.

Nixon’s actions are considered to have been a political success but an economic failure. The import tax was scrapped within months. And the U.S. economy struggled for years with stagflation — a combination of low growth and high inflation — that was only squeezed out of the system in the 1980s by Federal Reserve Chair Paul Volcker’s tough monetary policies.

Who is the real enemy?

China. Although Trump has only threatened to hit China with tariffs of 10 percent, the tariffs still hanging over Canada and Mexico are indirectly aimed at Beijing.

That’s because, under the USMCA trade accord (the successor to NAFTA), Chinese companies — e.g. makers of electric vehicles — would normally enjoy duty-free access to the U.S. market if they locate production in North America.

In recent years there has been bipartisan consensus in Washington on the need to fight back against China and its economic model, which has created vast industrial overcapacity and has flooded world markets with surplus production. Since taking office, however, Trump has dialed back the rhetoric, saying he just wants a “fair” trading relationship with China.

One thing to watch: Will Trump drop the tariffs against America’s allies if they agree to align with the United States in shutting out China? That’s one straw the European Union is clutching at in the hope of keeping the transatlantic peace.

How far can this escalate?

Trump, in his second incarnation as U.S. president, has shown no inhibitions in questioning the territorial integrity of other nations — jibing that Canada should become the 51st U.S. state or staking a claim to Greenland, a protectorate of EU member Denmark.

A greater concern is that, in playing fast and loose with international law, Trump is playing into the hands of leaders — like Russia’s Vladimir Putin — who want to overturn the status quo. In a world where multiple fires are burning, Trump is liberally splashing gasoline and tossing matches to start new ones.

Can Europe escape Trump’s wrath?

The U.S. president has been amping up his rhetoric, on Sunday night calling the EU an “atrocity.” Brussels is desperate to engage, offering to buy more U.S. liquefied natural gas or weapons as Trump presses European governments to spend more on defense.

Last time, Brussels answered Trump’s steel and aluminum tariffs by retaliating against motorbikes, jeans and bourbon — measures targeted to cause maximum pain in Republican strongholds. 

The EU could do the same again — or wield its trade “bazooka,” the anti-coercion instrument, which would put retaliation on a stronger legal footing. Experts worry, though, that the anti-coercion instrument may be too slow, because it foresees a period of consultation before action. The EU needs a new, bigger bazooka that can be fired in real time, they argue.

Can Trump be stopped?

Trump is, for the first time, invoking emergency powers under the 1977 International Emergency Economic Powers Act (IEEPA), so far only used by Joe Biden to impose sanctions against Russia over Putin’s war against Ukraine. 

The IEEPA hasn’t yet been used to justify tariffs — and it’s possible that business groups which suffer financial injury as a result will take legal action. It’s unlikely, however, that a judge would issue an immediate injunction against the tariffs. Any litigation would likely be drawn out.

The U.S. Congress might also have the power to halt Trump’s trade war. On top of the doubtful justification that fentanyl and illegal immigration represent an economic emergency, the legislature has also delegated broad responsibility for trade policy to the president — it first did so to Franklin D. Roosevelt back in 1934 — and can take it back.

But with both the Senate and the House of Representatives under Republican control, a major rift would have to open up on trade to stop him in his tracks. And that looks unlikely right now.

Then there’s the World Trade Organization — a global body created 30 years ago to act as an umpire in trade disputes. It’s currently unable to fulfil that role, however, after both Trump and Biden blocked the appointment of judges to its Appellate Body, or highest court of appeal.

The bottom line

For Trump there are no rules. It’s the law of the jungle out there. So unless there is a strong political or judicial backlash in the United States against his trade war, he will be hard to stop. 

Then again, he might just do a deal.

This story has been updated.