estimate “If goods don’t cross the border, soldiers will.” It is often attributed to the 19th century writer and free market economist Frederic Bastiat. These specific words linked together with this specific phrase cannot be found in the Bastiat publishing catalogue, but their sentiments are of a type that he would likely have approved of.
The point is that free trade not only increases the wealth of diverse societies, but can also be essential for peaceful relationships. The collapse of free trade often coincided with war. These wars begin as currency and trade wars and escalate into gunfights. This is something that President-elect Trump should keep in mind when he increases import tariffs in the future.
Global trade has expanded uninterruptedly for so long that only old people can remember anything else. But global trade has not always expanded. In fact, there have been long episodes of global trade contraction that have persisted in long-term trends spanning thousands of years.
For example, the Silk Road was established by the Chinese Han Dynasty in 130 BC. This ancient route enabled continuous trade between East and West for nearly 1,600 years. The Silk Road was not just a conduit for the exchange of goods. It was also a conduit for exchanging culture, knowledge, epidemics, and diseases between civilization networks.
Like other features of civilization that once seemed permanent, these trade routes eventually came to an end. When the Byzantine Empire fell to the Turks in 1453, the Ottoman Empire closed the Silk Road and severed all ties with the West. The geopolitical trend in East and West was inward, towards isolation.
decline in global trade
Today, global trade is conducted by transporting cargo across international waters on the high seas. Trade cycles over the past 200 years have often extended over such long periods of time that generations have come and gone and only been aware of the expanding half of the trend. These extended expansion events led people to believe that the increase in world trade was a linear phenomenon.
You have to go back to the pre-1960s America, Japan and Western Europe to find anyone who remembers the contraction of global trade. China’s recent trade expansion began in the 1970s. Eastern Europe began in the early 1990s.
Anyone who wants to look back on the first half of the 20th century will find something that runs counter to their own life experiences. World trade as a share of total economic activity declined after the start of World War I until the 1960s. This is the decline in global trade for almost 50 years.
We assume that the collapse of the classical gold standard with the beginning of World War I had something to do with this. Eastern Europe experienced rampant hyperinflation in the 1920s, and in the United States, inflation manifested itself in massive stock market bubbles.
When that failed and the world plunged into the Great Depression, the Smoot-Hawley Tariff Act of 1930 and its retaliatory tariffs axed what was left of world trade. It also heralded the start of World War II.
It was only after World War II that international trade recovered. This trade was hesitant at first, but blossomed in the second half of the 20th century. Nevertheless, this does not mean that trade will continue to expand indefinitely.
political intervention
Geopolitical shocks have periodically disrupted or reversed the overall long-term trend of world trade expansion. The World Trade Organization (WTO) annually publishes a World Trade Report that documents the state of international trade and provides a wealth of facts and anecdotes. Read them carefully and you may discover some interesting insights. for example, World Trade Report 2013 The following nuggets were included:
“politics [at times] Interventions, sometimes consciously, sometimes accidentally, have slowed or even reversed the integrationist pressures of technology and markets. It is the complex interplay of structural and political forces that explains successive waves of economic consolidation and collapse over the past 200 years. In particular, how the seemingly inexorable rise of the 19th century’s ‘First Age of Globalization’ came to an abrupt halt between 1914 and 1945 – due to related catastrophes such as World War I, the Great Depression and World War II – in the second half of the 20th century. The ‘second era of globalization’ will arrive.”
There are times when extrapolating from the economic past and predicting the future can be too reckless and blind. Right now, it’s probably one of those times. In our estimates, it is very likely that various geopolitical shocks, including war and currency disruption, will disrupt or reverse the expansion of global trade that has continued since the 1960s.
For now, it seems very likely that another prolonged global trade contraction will begin. The driving force behind the trade contraction is politically motivated trade wars.
President Trump pledged to impose tariffs of at least 60% on Chinese imports. The intended goal is to correct the staggering $300 billion annual trade deficit the United States has with China and reposition the United States as a manufacturing powerhouse.
Somehow, trade tariffs will force factory jobs to return to America’s Rust Belt, allowing the country to experience complete MAGA nirvana. Moreover, by doing so, America’s forgotten workers will be freed from fentanyl addiction.
This all looks great. But will an all-out trade war achieve the results America wants? We will soon find out in real time…
How does the trade war end?
Simply put, a trade war will lead to a contraction in trade. Less trade means fewer imports and exports. A decline in exports and imports of goods means slower economic growth. Lower economic growth means less wealth creation.
Simply put, a trade war means a smaller economy. This also means fewer choices and less global wealth.
For U.S. consumers who rely heavily on imports, that means higher prices. This also means you have fewer choices.
As the trade war intensifies, all sorts of strange and dysfunctional things will happen. American visitors to China can find high-quality electric cars made by companies they’ve never heard of selling for $10,000 each.
These brands and their low prices are effectively excluded from the US market. At the same time, American workers would earn $20 an hour to make socks, which would quadruple the price.
Nonetheless, Trump has pledged to impose blanket tariffs of 10 to 20 percent on other countries as part of his America First economic policy. He reserved a special 60% tariff for China.
The purpose of these tariffs is to generate revenue to offset Trump’s tax cuts, in addition to potentially increasing Made in USA products. Import tariffs combined with domestic tax cuts will reduce imports while household and business spending will increase. This is the secret to rising consumer prices.
It is possible that a politically motivated trade war could lead to a world war. So what? Can you undo the results before it’s too late?
Alas, the historical precedent is not very pleasant.
Once a global trade war begins in earnest, it virtually never ends quickly. Like the California wildfires, large fires cannot be stopped once they start.
Only the complete devastation and destruction of a world war and a complete reset of the balance of power will bring the trade war to a bitter end.
[Editor’s note: Have you ever heard of Henry Ford’s dream city of the South? Chances are you haven’t. That’s why I’ve recently published an important special report called, “Utility Payment Wealth – Profit from Henry Ford’s Dream City Business Model.” If discovering how this little-known aspect of American history can make you rich is of interest to you, then I encourage you to pick up a copy. It will cost you less than a penny.]
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minnesota gordon
for economic prism
A return to the economic prism in How the Trade War Ends
