- Economists are worried that President Trump may be gearing up for a trade war.
- On Wednesday, China announced its first retaliatory actions against the U.S.
- In the 1930s, a U.S. trade war escalated into a real war.
It looks like President Donald Trump is gearing up for a trade war. But in this kind of fight, history seems to indicate there are very few winners.
Economists are warning about hypothetical scenarios where Trump takes it too far, and other countries strike back, inevitably sending the global trade community down a spiraling path of retaliation. Roughly a month after Trump's initial announcement, we're starting to see the first signs.
On Tuesday, Trump released a list of Chinese imports he plans to target with his proposed tariffs. Less than 24 hours later, Beijing announced new tariffs on 106 U.S. products.
No one knows exactly what will unfold once the new tariffs go into effect. But if history is any indicator, we can make a pretty good guess.
There have been a number of trade battles in the last 80 years.
More recently, former President George W. Bush imposed steel tariffs in 2002. He was met with threats of retaliation from European trading partners. And soon after, he ended the tariffs.
But in one case, a trade war had dire global consequences.
Let's take it back to the 1930s. America was turning inward with protectionist policies. The government was restricting trade with other countries. And in an effort to save U.S. factories, a couple of congressmen came up with a plan. It was formally called the Tariff Act of 1930, but it's more commonly known as the Smoot-Hawley Tariff Act.
The plan faced a lot of opposition, but it ultimately became law. The act raised tariffs on American imports to nearly record levels. But instead of reviving the economy, it actually exacerbated the Great Depression.
Nations across the world were striking each other with tit-for-tit tariffs. European countries put a tax on American goods, which slowed trade between the U.S. and Europe. That made it harder for the U.S. to crawl out of its economic slump.
Nationalist rhetoric was heating up, with countries blaming others for their struggles. All of that eventually escalated, turning a trade war into a real war when World War II began.
That's why after the war ended, nations formed the World Trade Organization to regulate international trade, in the hopes that nothing like the global trade war of the 1930s would ever happen again.
Fast forward to today – here's what's at stake.
A key part of Trump's base is U.S. factory workers. So it shouldn't come as a surprise that he's pushing to revive U.S. factories.
But China isn't even one of the top 10 steel importers to the U.S. Canada and Brazil are. And while Trump's tariff plan may appeal to his base of U.S. factory workers, a number of other groups that usually have Trump's back are speaking out against it.
U.S. businesses that import steel, such as car manufacturers, and aluminum importers such as beer can makers, are asking him to rethink the plan. Trump's chief economic advisor Gary Cohn left the White House just after the plan was announced. And now, lawmakers from his own party are begging him not to do it.
Wall Street isn't too happy about the plan either. When Trump announced the tariffs the first time on March 1, the Dow closed more than 400 points lower.
Despite the mounting opposition, Trump moved forward with his plan.
On March 8, Trump signed a presidential proclamation. He was surrounded by some of his top advisors and a carefully arranged group of factory workers. The very people who helped get him elected.