A Primer on Trade Wars

Why they happen, and why they’re bad

Source: USITC and Yale Budget Lab

Cry “Havoc!” and let slip the dogs of trade war.

Donald Trump’s “Liberation Day” tariffs aren’t just the biggest trade shock in history. They’re also in clear violation of U.S. international agreements, including the General Agreement on Tariffs and Trade (the GATT), a multinational, reciprocal trade agreement that has governed most nations’ trade policies since 1947. In effect, Trump has set fire to a finely balanced mechanism that has fostered the growth of international trade by constraining how countries can set tariffs. In so doing, Trump has set the stage not just for his own tariffs but for retaliatory tariffs by other countries. That is, he has started a global trade war.

This week’s primer will explain why trade wars are bad, and why they can happen anyway. I’ll address the following:

1. The case for low tariffs even if other countries have high tariffs, and the caveats to that case

2. The monopoly power theory of trade wars, which makes economic sense but probably isn’t what’s going on

3. The interest-group theory of trade wars, which most international trade economists probably subscribe to

4. Do we also need a stupidity theory of tariffs?