In the post-war era, the world economy has marched steadily along, shedding tariffs, liberalizing trade, opening up markets and signing free trade deals. That is, until Donald Trump came along.

Trump is hardly the first U.S. president to impose tariffs on other countries; Barack Obama, for example, hit Chinese tire imports with a tariff in 2009, and George W. Bush launched widespread steel tariffs in 2002, much like Trump.

But Trump is going much further. Where Obama focused on China and Bush kept North American trade partners happy with an exemption, Trump is no longer offering such relief, even in the midst of a renegotiation of the North American Free Trade Agreement. And after a bitter G7 summit, Trump has tweeted that his administration is looking at “tariffs on automobiles flooding the U.S. market,” a potentially huge escalation in what is already looking like a trade war.

“It’s disappointing because it feels schizophrenic,” said Michelle Egan, a professor at the School of International Service at American University.

The unfocused nature of the American tariffs and the piercing rhetoric from the president and his circle that has accompanied them has unsettled trade experts. And it’s left many wondering: if this keeps escalating, how bad can it get?

American tariffs sparked the global trade war that cratered the world economy in the 1930s and it was an American effort that led to the steady trade liberalization of the last 80 years.

“The U.S. was the creator of the (World Trade Organization) system and the free trade system that we took for granted until now,” said Mary Anne Madeira, an assistant professor of political science at the City University of New York.

“Without our leadership, we could return to that,” she said.

Could new American trade sanctions send the world back to the bad old days? It’s not impossible.

Here are the good, bad and ugly scenarios on the horizon.

The Good

To economists and experts on international trade, there aren’t a lot of genuinely good scenarios here, but something along the lines of a “least worst” outcome does exist.

“The best case scenario would be that growth slows down, the Trump administration recognizes what’s happening and reverses the policies,” said Madeira.

That’s exactly what happened to Bush in 2002 when he brought in his own steel tariffs. The move was a short-lived boon for the American steel industry, creating about 3,500 new jobs. According to the Peterson Institute for International Economics, each job cost consumers about $400,000 in the form of higher prices and the meagre job gains were counterbalanced by about 200,000 job losses in other industries.

After an outcry from those affected industries, a panicked Bush administration started offering exemptions and, 18 months later, the tariffs were lifted completely.

That’s the best case scenario for a lot of experts: a small net job loss, minimal economic damage, some angry allies and an embarrassing climbdown from the administration.

Genuine optimism only seems to come when they look at the long-term outlook.

“Once Trump is out of office, and we have a president who understands the value of liberal trade I would expect that things would sort of normalize,” said Madeira.

Writing for Bloomberg, George Mason University economist Tyler Cowen said he disagreed with the tariffs but was optimistic about world trade in the long run, mainly because the complex modern global trade system makes protectionism less effective.

The Trump administration will find, like Bush did, that domestic steel will enjoy a nice boost, but all the American industries that buy steel will suffer. It’s hard for any president to get a clear economic or political win with tariffs.

“Policy makers might like to think that tariffs can target foreign interests with precision, but that has never been less the case than now,” wrote Cowen.

The Bad

An escalation in a global trade war “could translate into a decline in global trade flows amounting to nine per cent, similar to the drop seen during the global financial crisis in 2008-09,” a new World Bank report reads. The International Monetary Fund described that crisis as the worst since the Great Depression.

At the very least, “the probability of an abrupt slowdown in global growth has risen and could increase further,” the World Bank report reads.

Egan said the situation reminds her of the Nixon Shock in 1971, when Richard Nixon pulled the U.S. off the gold standard and instituted a 10-per-cent import tariff.

Although the move was hailed as a political success at the time, it’s widely seen as precipitating the stagflation of the late 1970s. Egan said an escalating trade war could have a similar delayed effect, the same way the result of the Brexit referendum has only recently negatively affected British economic growth.

“It may take some time for us to feel the effects of it,” said Egan.

Egan said it could be harder for the U.S. to make concessions in the wake of the strong reaction from the affected countries, especially Prime Minister Justin Trudeau.

“I think the gauntlet thrown down by Justin Trudeau has made this more difficult,” said Egan. “It’s now harder to make concessions.”

Egan said she didn’t blame Trudeau for reacting the way he did and that “his response has been noted in Washington.”

The Ugly

The ugly scenario is unlikely, but would be a spiralling catastrophe limited only by the imagination. And in a sense, the world has already lived through some version of it.

“Worst case scenario, this is just a general escalation of economic nationalism and protectionism,” said Egan.

In response to the early days of the Great Depression, the U.S. Congress tried to protect American agriculture with import tariffs. It would be an understatement to say members of Congress got carried away: the bill soon covered 20,000 products, sparking retaliatory measures from around the world.

Canada responded with tariffs that cut U.S. exports in half and world trade cratered, devastating economies across the globe.

“Worst case scenario would be what happened in the inter-war period when we were already in a depression, we had protectionist trade policies that deepened and prolonged our depression,” said Madeira.

“Global trade totally collapsed That’s not all due to those tariffs, but it’s largely due to those tariffs,” she said.

Madeira has written extensively about the connection between liberalized trade and peaceful co-existence between nations. It’s no coincidence that the economic collapse in the 1930s was followed by the Second World War.

“We didn’t have a strong incentive to resolve disputes peacefully. That’s how trade promotes peace. You don’t want to kill the goose that lays the golden eggs,” she said.

• Email: sxthomson@postmedia.com | Twitter:





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