From the trade policy point of view, the global economy is starting to resemble the previous era of large-scale trade wars in the 1930s. Tensions between the United States and China were growing already during President Obama’s term as trade war rhetoric re-entered the political discussion.
A concrete turning point towards trade wars occurred with the economic sanctions imposed on Russia and the country’s reaction to these. The Russian government has been supporting the emergence of new domestic business to replace imports. And instead of seeking a return to the times before the embargo, Russian economic policy has now assumed autarkic features, that is, those of a subsistence economy. Donald Trump’s actions as the President of the United States have brought the threat of protectionism to a global level: Withdrawal from trade agreements and the beginning a trade war with China may severely shake the global economy at large.
This situation seems strange if we look at trade policy from a rational, commonly shared viewpoint. Economic and economic history research unanimously demonstrate that, in the long run, especially individual consumers benefit from free trade and from the removal of obstacles to it in general. In the short term, however, problems arise because when prices are determined in the global market, lower production costs bring competitive assets to some regions while diminishing such assets in others. Yet after transition periods both consumers and enterprises benefit.
Why then have politicians initiated a discussion and process that, in the worst-case scenario, can lead, or is already leading, to a new protectionist era?
There are two answers to the above question. Firstly, the concept of protectionism as such is so broad and complex that it is hard to define when we are in a trade war. There is no comprehensive indicator even with respect to digitalisation and the global financial system, but the dissolution of free trade agreements and the use of trade embargos are steps that suggest the time of trade wars is already present or at least near. Even the process leading to the strengthening of protectionism can be complex and hard to identify. The development trend of the 1930s began with changes in trade agreements and moderate tariff increases but then gradually proceeded gradually towards quota-based and clearing trade as well as national economies aiming at full self-subsistence. There were many national economies of this kind in Europe in the 1930s, a setting that eventually resulted in the Second World War.
The process leading to this was much harder to see for the politicians and experts involved than for us looking at the process in hindsight based on the ultimate outcomes. For example, although Finnish trade policy experts recognised the situation at the beginning of 1930s and understood the problems of an open national economy like Finland, they were soon driven to a series of negotiation processes aimed at minimising losses but which cumulatively resulted in reduced openness and increased consumer prices for Finland.
In other words, a trade war is not imposed on any given occasion or declared by an actual decision but nations end up in one as a result of a number of individual decisions and compromises. The course of such development is hard – if not impossible – to intervene in, especially if the leadership of the world’s largest economy is not up to it.
Secondly, the advantages and disadvantages caused by trade wars are not evenly distributed, as different economic players have different possibilities to organise and adjust their operations. In the 1930s, enterprises and various lobbying organisations representing them typically played a strong role in trade agreement negotiations. In Germany, for example, the state was striving towards self-subsistence but at the same time incorporated German companies, cartels, and organisations as part of the economic policy apparatus, thereby creating opportunities for German enterprises to make previously unheard profits.
In the same vein, trade embargos and the dissolution of free-trade agreements benefit some enterprises immediately, and in the longer term, an even larger number of companies adapt to the new trade policy system and learn to turn it to their benefit. Abnormal becomes the new normal through this adaptation process. The same adaptation process also explains why the fully irrational trend to undermine free trade is even possible.
Enterprises and well-managed economic lobbying organisations have a chance to maximise their own benefits also under trade war conditions, but unorganised urban consumers will always lose in economic terms.
Protectionism can thus creep in insidiously and it is surprisingly easy to get used to it. We know from economic history that the loser is always the individual urban consumer, whose only real chance to change the direction of trade policy is to vote in elections. Finland in the 1930s managed to cope with the ever more complicated trade policy setting by seeking to minimise its losses while also preparing for the worst. We may now be faced with a similar situation. In other words, the current trade policy setting looks rather grim. If Brexit becomes a reality and the USA ends up in differing degrees of trade wars with its adversaries and allies, the Finnish economy in general and Finnish companies in particular will have hard times ahead.
The writer is a professor of strategy and economic history at the University of Jyväskylä.
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