In the 1980s, US President Ronald Reagan initiated a military spending race with the Soviet Union that ended up altering the global balance of power in ways that affected many countries worldwide. Could Donald Trump's tariff race with China lead to a similar outcome?
NEW YORK – The latest round of tit-for-tat tariffs by the United States and China has intensified the ongoing global debate about whether the world is facing a mere trade skirmish or heading rapidly toward a full-blown trade war. But what is really at stake may be even more fundamental. Either accidentally or by design, US President Donald Trump’s administration may have paved the way for a “Reagan moment” for the international trade regime.
In the 1980s, US President Ronald Reagan initiated a military spending race with the Soviet Union that ended up altering the global balance of power in ways that affected many countries worldwide. Today, Trump has launched a tariff race with China, an economic superpower, perhaps with similarly far-reaching potential consequences. Like under Reagan, the US is better placed to win the current competition with China – but the risks are sizable.
In the latest escalation of the trade dispute, the US imposed levies on $34 billion worth of Chinese imports. China immediately implemented retaliatory tariffs, spurring the US to threaten even more protectionist measures. These actions exacerbate tensions over the Trump administration’s imposition of tariffs on imports from other countries, including some of America’s closest allies (such as Canada), and its threats to withdraw from the World Trade Organization, which undergirds the rules-based system regulating cross-border flows of goods, services, and capital.
Many existing trade agreements would benefit from modernization. And most economists agree that the US has genuine trade grievances against China, including intellectual property theft, asymmetrical technology transfers, and non-tariff barriers, such as the requirement that foreign companies enter joint-venture agreements with domestic firms to access the Chinese market.
But most economists also agree that competitive tariffs are a risky way to address these grievances. Because tariffs transmit stagflationary pressures (that is, they encourage simultaneous economic contraction and inflation), they risk undermining a global recovery that is already facing challenges. And they complicate long-overdue monetary-policy normalization, while increasing the likelihood of global financial instability. The resulting systemic cracks could jeopardize the entire rules-based multilateral trading system at a time when there is no good alternative.
Many economists hesitate on precisely what lies ahead. For example, one group, while recognizing that the current tensions increase the risk of a policy accident or mistake, views them as part of a process of posturing and negotiation. When push comes to shove, they argue, the world’s major trade powers will avoid a mutually destructive approach, opting instead for negotiations that yield a still-free but fairer regime. Reinforcing this view are preliminary indications that the European Union may now be willing to consider a zero-tariff automobile initiative.
Another group, citing historical precedent, warns that beggar-thy-neighbor trade measures can quickly spiral out of control, taking a heavy toll on living standards. At a time of pronounced political polarization, anti-establishment anger, and mistrust of expert opinion – owing to economic disappointments and widespread fear of cultural and technological change – heightened protectionism would likely fuel even greater nationalism, populism, and inward-looking policymaking.
But the comparison to Reagan suggests that there may be other, broader implications. By forcing the Soviet Union into a military spending race that only the US could win (at the cost of rising debt and a higher risk of conflict), Reagan accelerated the demise of what he called the “evil empire.”
It was a bold and risky strategy that ultimately changed the political map of Europe. Even before the Soviet Union’s demise, resulting in 15 new countries, its European “empire” had collapsed. The Berlin Wall had fallen, bringing German reunification, and Yugoslavia was disintegrating. Soon after, Czechoslovakia’s “Velvet Divorce” gave rise to the Czech Republic and Slovakia, which – together with other Central and Eastern European countries (including Hungary and Poland) – then anchored themselves firmly in the West by joining NATO and the EU.
Today, a trade war would damage all economies. But the US – which is relatively less dependent on foreign markets, possesses deeper domestic markets, and is generally more economically resilient than other countries – would do better than most others in a contracting world economy. Already, Chinese financial markets have suffered, while those in the US have held their own.
Game theory suggests that rational actors, recognizing how damaging a trade war would be for them, would see the merit of abandoning a retaliatory strategy, and instead accede to many US demands. All of this could leave the US more able and willing to halt the multi-year erosion of its global economic influence and standing.
But the success of this approach is far from guaranteed. Its execution will require more mutual trust than is currently on offer. A divided US public will need to be kept on board throughout the retaliatory phase, which will lead to higher prices and, in some cases, greater job insecurity.
Furthermore, the Trump administration will need to avoid actually pushing other countries (especially China) too hard too soon, thereby threatening the entire global economy with a possible recession and markets with disorderly declines. Already, the US Federal Reserve, relying on its contacts in the domestic business community, has warned that corporate investment plans could be “scaled back or postponed” because of uncertainty over global trade relations. And let us not forget that China holds a massive volume of US Treasury bonds which, if pushed too hard, it could use to try to destabilize the US government bond market, which is essential to the health of the global financial system.
It is too early to say whether a “Reagan moment” on trade will play out and deliver more than a fairer system. After all, such an approach would require careful strategic design and skillful implementation – not to mention plenty of good luck – guided by a nuanced understanding of economic, political, and geopolitical factors. That is why we must move beyond the question of whether this is a trade skirmish or a trade war to develop real strategies for the “Trump trade moment,” should it arrive.
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