Risks of a global trade war are considerable. The current situation resembles a prisoner's dilemma, where two actors defect in the short run to seek individual gain even though cooperation would bring both parties greater rewards over time
The Nobel Prize-winning economist, Paul Krugman, once opined: “Our grandfathers lived in a world of largely self-sufficient, inward-looking national economies - but our great-great grandfathers lived, as we do, in a world of large-scale international trade” [1]. Historically, trade has played a significant role in the growth and prosperity of many economies, with 19th-century Britain and contemporary China cases in point. That said, recent years witnessed a resurgence of economic nationalism, and President Trump's emphasis on tariffs is a manifestation of this.
A principal motivation behind US President Donald Trump's tariffs agenda is resuscitating US's manufacturing base and rectifying what he deems “excessive trade deficits” with trading partners. While tariffs also featured during his first term, the ones currently proposed are broader (i.e., target more countries and products) and more acute. First, it's worth noting that the United States has generally been less open trade-wise than many other countries. In that sense, the US' relatively "unopen" trade posture predates Trump 2.0. Nonetheless, the scope and nature of these tariffs are dramatic.
- Global economic vulnerabilities
The implications for the global economy are significant. For context, many developed and emerging economies find themselves more fiscally vulnerable than they were during Trump's first term: central government debt as a percent of gross domestic product (GDP) is generally higher, inflationary pressures are stronger, monetary policy is tighter, and productivity growth is feeble. Meanwhile, geopolitical tensions are elevated, supply chains are more fragmented, countries are competing aggressively for key commodities and minerals, and climate change is more menacing.
A tariff-triggered trade war is likely to reduce global trade and stymie economic growth, complicating countries' efforts to stabilize public finances and promote living standards. Moreover, consumer prices will rise in all countries levying tariffs, precipitating a possible "stagflation". Countries that trade more closely with the US (e.g., Canada and Mexico), as well as other small open economies and emerging markets, are more susceptible to the negative impacts.
In terms of leverage that other countries possess, the answer varies considerably. For example, as a large importer of strategic US exports (e.g., semiconductors), China could retaliate with its own tariffs and has already done so. China exerts significant leverage as it imports more than $150 billion dollars of US exports, holds approximately $750 billion dollars of US debt, and is the world's largest producer and exporter of essential rare earth minerals. Whereas Canada and Mexico possess more limited leverage: nearly 80% of Canada's exports go to the US, and these exports are concentrated in sectors such as hydrocarbons and lumber. In fact, some studies show that by retaliating with its own tariffs, Canada risks worsening its own situation [2]. Broadly speaking, most countries find themselves with limited leverage given the nature of the proposed tariffs and the state of their economies. This is especially true for small open economies, emerging markets, and countries that trade significantly with the US.
As an open and export-driven economy, Türkiye is also at risk. In 2022, trade represented 81% of Türkiye's GDP, compared to the 63% OECD average. It is worth noting that Türkiye doesn't trade as much with the US as some other countries, and the US is not running a significant trade deficit with it. This would suggest that Trump is unlikely to directly target Türkiye the way he targeted Canada, Mexico or China. Nonetheless, Türkiye will be indirectly affected: A trade war would exacerbate the country's inflation, reduce growth and induce a tight monetary policy. Industrially, Türkiye suffers from low productivity, underinvestment in technology, and a skilled worker shortage. A trade war could aggravate these realities.
In sum, the risks of a global trade war are considerable. The current situation resembles a “prisoner's dilemma”, where two actors “defect” (i.e., not cooperate and impose tariffs) in the short run to seek individual gain even though cooperation (i.e., open trade) would bring both parties greater rewards over time.
- Opportunities amidst turbulence
Nonetheless, this episode presents countries with an opportunity to:
Such measures could enhance countries' ability to withstand the negative consequences of a tariff-induced trade war.
[1] https://www.nytimes.com/2008/08/15/opinion/15krugman.html
[2] See https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3190699 for example.
*Opinions expressed in this article are the author's own and do not necessarily reflect Anadolu's editorial policy.
