In economic globalisation and trade liberalisation where countries are eliminating trade restrictions to trade more, a full blown trade war between the US and China is brewing.
It started with the US instituting a 25 per cent tariff on imported steel and a 10 per cent tariff on imported aluminum from China.
In retaliation, China announced fresh tariffs on 106 US products worth $50 billion. A day later, the US said it’s considering a $100 billion additional tariffs with China on the other hand holding that commensurate action will follow.
This trade war may seem a sharp emergence but it follows a pattern of a sudden rise of a global tariff war among countries pre-meditated by the Brexit can of worms.
Now, the beginning and the end of a global tariff war or escalation is that it’s bad for everyone.
Global prices will rise, thus slowing down productivity of global economy and two World Bank economists Peter Lindert and Jeffrey Williamson have analyzed through historical phases the development of this economic phenomenon.
From 1820 to 1914, an imperial period which did have significant free trade within networks that were demarcated by particular empires, global economy performed better because price gaps between countries fell by 91per cent due to cheaper transportation that dropped by 72per cent and tariff deductions by 28per cent.
Then came the autarchic period 1914-1980 where countries were much more economically self-contained or closed in on themselves with high tariffs being charged on imports and sometimes of exports too.
Global price gaps increased by 100 per cent largely due to tariff and non-tariff barriers countries charged on goods coming across national borders, leading to a global slowdown.
From 1980 to today, we’ve seen increasing free trade cut into those tariffs reducing them significantly over time from one country to the next improving the global economy by more than two per cent.
Global price gaps have fallen again, this time 26 per cent due to cheaper transportation and 74 per cent due to reductions in tariff and non-tariff barriers.
Contrary to the mercantilist wisdom that tariff and non-tariff barriers reduce imports so as to favour a country’s balance of trade, history, however, shows that it’s counterproductive.
Tariff barriers actually hit both imports and exports, hurting an economy’s productivity and performance.
Import-export trends show that countries that have the lowest trade barriers, which is Singapore and Switzerland, have some of the biggest trade surpluses while countries that have the high trade barriers Brazil and India have the biggest trade deficits.
Economist Jacob Viner, one of the inspiring mentors of the Chicago School of Economics and a major contributor to international trade economics explained that a country which imposes high tariffs to limit imports is one courting perpetual poverty.
So as the US-China trade wars is opening floodgates of global tariff escalations, the implications portends to hurt developing countries.
More than two-thirds of African countries find themselves in either a debt crisis, debt distress or heading towards one and many are imposing import tariffs to improve their balance of trade so as to ease pressure on their currencies and tame the ballooning of their foreign debt portfolio.
But trade has evolved that it involves a lot of movement of component parts and not just finished products.
So as African countries juggle between limiting imports to improve balance of trade and protect local industries or improving cost of living through importation of finished products that come cheaper, both will be coming at a high cost at the global market.
Therefore, the autarchic escalation led by US-China trade war spells the proverbial case of choosing between the devil and the deep blue sea for African countries.