From Escalation to Economic Slowdown: The Mechanics of Trade Wars

While the American president has delayed carrying out some of his threats, he announced on Wednesday 25% additional customs duties on cars and spare parts entering the United States, and promised a new round on April 2.

Climbing and gearing

"A country appears weak if it does not impose retaliatory measures" in the face of tariff increases, explains Aurélien Saussay, professor at the London School of Economics.

And promises of retaliation were not long in coming, or even directly implemented: from the first American measures, China responded with taxes on products from American agriculture.

The European Union has promised to respond by mid-April to the 25% tariffs that Donald Trump could announce on April 2.

Beyond the retaliatory measures that could multiply, the trade war will generate overproduction in producing countries.

"This is particularly the fear of Europeans, who could not only export less to the United States, but also see China attempt to flood their market to compensate for its decline in exports to the United States. To which Europe would in turn respond with an increase in customs duties to protect its industry," explains Éric Dor, director of economic studies at the IESEG School of Management.

The risk, he said, is that of an "endless chain of protectionist measures."

Declining growth

"The imposition of new bilateral tariffs and the associated worsening of political and geopolitical uncertainties will exert a dampening effect" on trade, the OECD predicted in its mid-March report, in which it revised downwards its global growth forecasts.

Mechanically, the increase in customs barriers leads to a decline in exports and therefore a decline in activity in producing countries. "Outputs are disappearing, which threatens jobs and growth," explains Aurélien Saussay.

One of the countries most threatened by the trade war is Mexico, one of the United States' main trading partners, which is expected to enter recession in 2025 according to the OECD. Japan, where one in ten jobs is linked to the automotive sector, is also highly exposed.

In so-called "emerging" countries, whose economies are highly dependent on raw materials, such as Brazil, the chain reaction of such a trade war is also being closely observed.

If US policy "significantly slows" global growth "to the point that commodity prices suffer," there will be "a negative impact" on emerging countries, such as Brazil, according to Benito Berber, chief economist at Natixis.

Untenable?

The increase in customs barriers that Donald Trump's policies could lead to if he carries out his threats would be unprecedented in nearly a century and plunges global trade players into the unknown.

"Will the global trading system survive Trump's tariffs?" Alan Wolff, former deputy director-general of the World Trade Organization (WTO), asked in a note published by the Peterson Institute for International Economics on Thursday.

But Donald Trump is facing pressure from the markets and automotive manufacturers, who are reluctant to remove tariffs, and could pay a heavy political price in the form of significant social or inflationary consequences caused by his decisions.

This could be the case, for example, with the taxes imposed on Mexico: "The more aggressive Trump is towards Mexico, the greater the consequences for the American economy," underlines Benito Berber, chief economist at Natixis.

"American pensions are much more directly dependent on the stock market, and more than half of Americans own shares," points out Aurélien Saussay, who notes that Donald Trump has already "backed down" several times since he began threatening tariffs.