Economists aren’t overreacting, Trump’s China trade war is a terrifying prospect
The Brexit vote hasn’t led to economic armageddon that some predicted, as Paul Ormerod rightly pointed out on Wednesday.
So are economists now overreacting to America’s potential trade war with China? And could such a trade war actually reduce inequality, as he hinted?
The answers are no, and no. If the US-China trade dispute escalates, it will hold back their economies, make people worse off, and put at risk the international trade system that has helped billions of people climb out of poverty and led to decades of growth in prosperity.
Read more: Trump’s tariffs are unlikely to plunge the world into a Great Depression
Alas, everything in the UK must be seen through the prism of Brexit. So, did economists overstate the impact of Brexit? I surveyed the economic studies before the vote.
A small minority – two out of 14 – predicted that the vote would trigger a recession. One of those was the Treasury – yes, the government was guilty of Project Fear. Almost all independent economists said growth would slow by around one percentage point a year until we left and, by 2030, the economy could be two to seven per cent smaller than otherwise. So far, the economy has slowed in line with these predictions – hardly proof that economists cannot be trusted
And economists are right about free trade. If you had to hunt or grow your own food and build your own shelter, you’d spend all your time doing that and barely reach subsistence. Instead, because we can trade, you can specialise and trade with others who do likewise.
Trade also has a macro effect: it enables ideas and technology to pass between countries. China and India are recent examples of trade-led growth. And no country in the world has become prosperous without trade.
So, what of the US and its trade war with China? So far, the tariffs are only affecting a small proportion of products. But if tariffs became broad, they would hold back both economies.
Studies have shown that Chinese trade growth from the late 1980s meant jobs in certain US sectors were lost. But even if tariffs could recreate industries of the past, this would be an imprecise way to address unemployment and inequality in the US rust belt – it would merely defer the problem of technology and create collateral economic damage, protecting vested interests and hurting low-income consumers.
Still, arguably the biggest issue – and why we should care – is that this trade war is happening with little regard to the global rules overseen by the World Trade Organisation. These rules should ensure fairness and arbitration in trade disputes.
If the world’s largest economic powers ignore the rules, decades of progress on removing unfair and damaging trade distortions could be reversed. A vicious spiral of trade tariffs would be extremely serious economically, to the whole world.
The economic growth of the past half-century has been imperfect, and more could and should be done to redistribute the benefits of trade and technology to the losers. Economics has always been clear that these benefits will need redistributing. But creating frictions on trade – or worse, breaking the rules that try to keep it fair – will shrink the number of good jobs, not share them more equally.
So yes, we are right to worry.
Read more: Protectionism isn’t just bad economics – it’s also immoral