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Strange bedfellows from Trump’s trade war

Over much of the past century, China, Japan, and South Korea have been bitter enemies. In the 1930s, the Japanese military gained control and mobilized the country for war. The rationale used to justify the war was Allied restrictions on raw materials essential for industrialization. But the famous Japanese economic historian Yasukitchie Yasuba refuted these claims, documenting that Japan had access to these raw materials through trade. Unfortunately, the Japanese generals won this argument and launched the most destructive war in human history.


After World War Two, Japan recovered to become a powerhouse in international trade. Large financial and industrial conglomerates (Zaibatsu) dominated Japanese industrialization from the Meiji Era until the end of World War Two, and Japan returned to this export-led economic growth model. China and South Korea followed Japan’s lead in pursuing export-led economic growth in the post–World War Two period. As they became more integrated into the global economy, they also experienced industrialization and rapid economic growth.


The Trump administration has launched a new trade war, not unlike that during the Great Depression, when the U.S. imposed the Smoot-Hawley tariffs. The U.S. will impose a 10% across-the-board tariff on all imports. The tariffs imposed on some countries are even higher — Japan 24%, South Korea 25%. A major target in this trade war is China, which now faces an additional tariff of 34% on top of the initial 20%.


The trade war launched by the Trump administration will lead to “beggar thy neighbor” policies in other countries, just as they did during the Great Depression. To the extent that other countries retaliate with higher tariffs, this will diminish global trade even further. The WTO estimates that the Trump tariffs will reduce global merchandise trade by 1%. The outcome of this trade war will be retardation in economic growth that will negatively impact incomes and standards of living, especially in the developing world.


China, Japan, and South Korea have much to lose from the trade war. China will be especially hard hit by the tariffs imposed on its exports to the U.S. So it is not surprising that these countries are exploring ways to secure and expand their own trading relationships. They have made significant progress in expanding trade through the Regional Comprehensive Economic Partnership (RCEP).


Image via Pxfuel.
Image via Pxfuel.

In 2012, China, Japan, and South Korea initiated discussion of a trilateral Free Trade Agreement (FTA). Not much progress was made in these discussions, but the tariff increases announced by the Trump administration have given new impetus to these negotiations. In the past week, Japan hosted trade ministers from China and South Korea to discuss trade relationships, including the triangular FTA. Initial discussions focused on securing supply chains among the three countries. Japan and South Korea are dependent on semiconductor raw materials from China, and China is interested in importing chip products from Japan and South Kora. Trilateral trade negotiations should ease restrictions on their trade, even if they do not lead to an FTA.


The trilateral trade negotiations between China, Japan, and South Korea set an important precedent for other countries, and especially the U.S. Not much progress has been made in multilateral trade negotiations in the World Trade Organization (WTO) in recent years, but plurilateral trade agreements have allowed countries to reduce barriers to trade and investment. By focusing on industries where there is room for agreement, as China, Japan, and South Korea have in their negotiations, countries can secure supply chains and market access.  


Over the past century, China, Japan, and South Kora have suffered from catastrophic wars, and they continue to have territorial disputes. But this has not prevented these countries from expanding trade and investment in mutually beneficial ways. Even though military conflict looms large in north Asia, this threat has not prevented these countries from expanding their trade ties. 


Japan and South Korea, two of our best trading partners, now question their close trading ties to the U.S. As the U.S. abandons its role in promoting free trade and investment, we should expect other countries to negotiate trade agreements that exclude the U.S.


Trump has proposed that Canada become the 51st state and that the U.S. annex Greenland and the Panama Canal. It is not clear how serious these proposals are, but foreign countries are not taking any chances. They are pursuing bilateral and plurilateral trade agreements to protect their sovereignty as well as their trading relationships. The trade war is a threat to peace as well as global economic growth.


Barry W. Poulson is professor emeritus at the University of Colorado, Boulder Colorado, and on the Board of the Prosperity for US Foundation. William Owens is a former vice chairman of the Joint Chiefs of Staff. He is on the Board of the Prosperity for US Foundation.


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