Despite reciprocal tariffs being imposed by the US, China and the EU, many economists think there is still only the threat of an all-out trade war. So what happens if tensions escalate further?The last four months have seen the world’s media chocked full of threats about a looming trade war between the US, China and the EU. Some have even suggested that the hostilities have already begun, thanks to the levying of billions of euros in tit-for-tat tariffs, alongside threats of more to come.
Despite the sense of impending doom, there’s been no formal announcement of a trade war, nor a specific date for the real fight to begin, not even so much as a countdown timer!
Humor aside, what exactly constitutes a trade war and will we even know when it has started?
Read more: Donald Trump’s trade spats with Europe, China and NAFTA ― What you need to know
According to the Oxford English Dictionary, a trade war occurs when “countries try to damage each other’s trade, typically by the imposition of tariffs or quota restrictions.”
That’s simple enough. In this example, US President Donald Trump’s tariffs against aluminum and steel imports have forced the EU into €2.8 billion ($3.26 billion) of retaliatory measures, while similar duties, aimed at slowing China’s technological advance, have seen €43 billion of countermeasures from Beijing.
So, rather worryingly — according to the dictionary definition at least — a trade war is already underway.
Fortunately, most economists see things differently, and believe that several rounds of reprisals have to take place for a trade dispute — even one with as far-reaching consequences as this one — to be really billed as a trade war.
“The US is still quite a long way from a trade war with China,” Heiner Flassbeck, an economist and former deputy minister in the German finance ministry, told DW.
Read more: Why higher US tariffs on car imports would backfire
More tit-for-tat measures needed
“It would require a never ending imposition of tariffs,” he said, before describing how relations would have to deteriorate to such an extent that both sides were no longer prepared to negotiate.
Other economists, like Stephen Woolcock, head of the International Trade Policy Unit at the London School of Economics, are loath to use the term ‘trade war’ at all.
“I prefer to see whether the trading system is functioning according to a generally accepted set of rules, or whether trade and investment relations are being shaped by power politics.”
Woolcock told DW that although there is always an element of power in trade relations, Trump is clearly not afraid to use Washington’s influence to renegotiate existing trade deals, ignoring decades of multilateral agreements.
“Using power to change the balance of economic benefits is dangerous for the rules-based order,” he said, referencing the World Trade Organization (WTO), the global body that regulates international trade.
Read more: China pledges to ‘immediately’ retaliate against Donald Trump’s latest tariffs
WTO doesn’t define trade wars
The WTO told DW it doesn’t know what constitutes a trade war. Along with its post-World War II predecessor, the General Agreement on Tariffs and Trade (GATT), its job is to prevent trade disputes deteriorating into protectionism, brutal trade wars and as history sometimes reveals, armed conflict.
But the WTO’s Director-General, Roberto Azevedo, recently warned of a scenario where the global trading system — which he said mostly operates silently without hitting the headlines — started to falter.
“If, for example, tariffs returned to the levels before the multilateral trading system was created we would see trade flows fall by 60 percent, while the global economy would contract by 2.4 percent,” he wrote.
Azevedo said the decline would be larger than the one that followed the 2007/8 financial crisis, a severe drop in living standards that would be felt by almost the world’s entire population.
Read more: Juncker promises Trump ‘facts’ as cold trade war threatens to heat up
Warning from history
Trump only needs to revisit recent US history to see how trade wars can backfire. In 1930, a year after the infamous Wall Street crash, Washington passed the Smoot-Hawley Tariff Act.
The law is widely credited with exacerbating the Great Depression, after tariffs on imports to the US were raised to record levels, forcing Europe to retaliate, and global trade to nosedive.
Trump’s threats have intensified since the first tariffs were mooted. He’s since taken aim at Chinese investment in US technology firms, and threatened to levy 20 percent import duties on European-made cars, which has irked Germany’s auto giants.
Beijing, Berlin and Brussels have all vowed to protect their own vital industries, so a scenario of never-ending tariffs no longer seems as unlikely as it did before.
Although his critics accuse Trump of sidestepping the multilateral rules-based trading system, Michael Hoffmann, a professor in law at Germany’s University of Münster, says, in some ways, Washington is adhering to WTO guidelines.
“Article 21 of the WTO’s General Agreement on Tariffs and Trade allows for the levying of import duties for reasons of national security, which is what the US has been arguing,” Hoffmann told DW.
But rather than believing that Trump’s tariffs seek to protect US industries that are vital to the country’s defense, other analysts see them as leverage to win additional economic gains from Washington’s biggest trading partners.
Read more: WTO: Weary Trade Organization?
WTO power weakened
They also see Trump as trying to undermine the WTO’s authority after he vetoed the appointment of new judges to the world body’s appeals chamber — dubbed the Supreme Court of world trade.
Hoffman admits the WTO’s dispute settlement system is now in danger due to the US’s rejection.
“Hopefully is not too late for the US to recognize that maybe this was the wrong direction, and to step back,” he said.
Economists often say that periods of uncharted territory, including this possible trade war, can only be fully measured once they’ve happened. In a profoundly more globalized world than the 1930s, it is difficult to know how far its impact will be felt, warns Flassbeck, who is now a professor of economics at the University of Hamburg.
“Nobody knows what the implications of the tariffs will be, even for the US, because trade flows are so intertwined nowadays,” he says, adding that it’s in neither the interests of Washington, Beijing or Brussels to pursue an all-out trade war despite all three of them heading in that direction.
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