In terms of the most direct costs of trade wars, foreign buyers hit with retaliatory tariffs look for new sources. New suppliers do not disappear. Domestic plants that close or move due to higher costs or lost markets do not reopen. If the Mid-Continent Nail Corporation in Missouri, which has gotten so much news attention around the steel tariffs’ impact, closes and moves its operations to Mexico, the costs to reopen it when the tariffs finally disappear could be prohibitive. And those jobs could be lost forever. Meanwhile, farmers already grappling with lower commodity prices find themselves with unexpected surpluses that deepen debt burdens. South American farmers will be happy to increase soy and corn production to feed the fast-growing Chinese market, and will not readily cede that market down the road.
The Trump administration’s seeming preference for escalation over negotiation adds a layer of uncertainty about U.S. policy that could further disrupt supply chains and deter investment by and in American firms. Foreign direct investment into the United States dropped 40 percent in the first quarter of 2018 compared to the previous year, the lowest level in four years. Meeting in Buenos Aires over the weekend, finance ministers and central bankers from the Group of 20 large economies—including the United States, Great Britain, France, Japan, China, Brazil and Argentina—called for increased dialogue to reduce the financial risks from ongoing trade disputes.
At the same time that President Donald Trump seems intent on closing the U.S. off from the rest of the world, other countries are continuing to negotiate agreements that will increase discrimination against American exporters. Japan led the way in salvaging the Trans-Pacific Partnership among 11 Pacific Rim nations after Trump rejected it. The deal, now minus the U.S., will lower the barriers that dairy farmers from Canada and New Zealand and cattle ranchers from Australia face in the Japanese market, giving them an advantage over American producers. Just this month, Japan and the European Union signed an economic partnership agreement that will give an edge to European winemakers. Eventually, Japanese auto producers will no longer face the 10 percent tariff in Europe that U.S. producers will continue to pay. While the Trump administration mulls additional barriers to trade with the rest of the world, Europe is negotiating to lower them with a long list of countries, including several TPP (Trans-Pacific Partnership) signatories in Mexico, Brazil and Argentina.
With regard to the trade war with China, Treasury Secretary Steven Mnuchin recently told a congressional committee that negotiations had broken down and that no resolution was in sight. At the G-20 meeting in Buenos Aires, Mnuchin said that it was up to China to make concessions, but he left those unspecified. If that means the trade war continues to escalate and drags on, the economic effects could become serious. Tariffs on all or most Chinese imports, as Trump has threatened, could even lead to inflationary pressures that cause the Federal Reserve to raise interest rates more than it otherwise would, which in turn could trigger a recession. The International Monetary Fund’s managing director, Christine Lagarde, told the G-20 ministers in Argentina that escalating trade fights could depress global growth by as much as half a percent.