The opening salvos of the trade war between the United States and China have sent shockwaves around the world. President Trump’s administration has broken with decades of free-trade orthodoxy, threatening tariffs not only on strategic adversaries like China but also on long-standing allies such as Canada and the EU. It has also reverted to the protectionist tactics of the 1970s, threatening to pull out of the World Trade Organization (WTO), an impartial international body that regulates and arbitrates global commerce.
The WTO system of global trade is a fundamentally sound arrangement, facilitating international prosperity. The WTO rules require nations to open their markets, to refrain from discriminatory trade practices, and to resolve disputes through mediation and arbitration. As the US-China conflict has shown, these rules are effective. The emergence of a trade war is a bad thing, however, because it increases costs and risks for consumers and producers alike, slows down economic growth, and exacerbates geopolitical tensions.
The US economy depends on trade with other countries for food, fuel, raw materials, and machinery and equipment. Manufacturers, which employ more than half of the US workforce, are particularly vulnerable to higher tariffs because they rely on imported inputs. Consumers are also likely to feel the pain of higher prices, especially in areas that rely heavily on imported goods such as consumer electronics and cars. When uncertainty lingers, businesses delay investment and hiring decisions, which further slows the economy. The US-China deal negotiated in Geneva, which averted an embargo of bilateral trade, offers a model for future talks. Both sides should negotiate mutual market liberalization, and they should agree to a process for dispute settlement that takes China’s economic weight into account.
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