By Eric Vandenbroeck and co-workers

When Trade Wars Become Shooting Wars

Trump’s disruptions to the global economy are serious, and they may feel novel. But today’s situation is hardly without precedent. One does not have to look especially far back to see what the president’s tariffs might do to the world. The problems the global economy now faces echo some that existed before the 1995 creation of the World Trade Organization and others that existed even before the WTO’s predecessor, the 1947 General Agreement on Tariffs and Trade (GATT). Until those bodies helped standardize commerce, countries frequently used trade to extract concessions from one another. They created and exploited what economists call “hold-up problems”: when one state or firm makes an investment in another in which profits depend on the continuation of the relationship. For example, one country could build oil infrastructure in another country that the supplier alone can service or operate. Once such deals are concluded, powerful countries can coerce their partners simply by threatening to change the terms of the agreement.

In the near term, countries can benefit from wielding trade as a cudgel. But in the long term, trade wars leave almost everyone worse off. When countries frequently use economic leverage to secure concessions from vulnerable partners, investment and economic growth go down. Political instability, meanwhile, goes up. States that chafe at economic coercion sometimes turn to their militaries to fight back. Countries that once cooperated because of commercial ties turn into competitors. Even close allies drift apart. Trump may think his tariff regime will make the United States richer, safer, and stronger. But history suggests it will do just the opposite.

American President Donald Trump may have backed off, for now, from the sweeping tariffs he proposed placing on almost every country in the world. But he is still upending global trade. Trump has established a baseline of 10 percent tariffs on most imports. He has made those levies higher for a variety of specific goods, including steel. And he slapped 145 percent tariffs on imports from China, the world’s largest manufacturer, although he has now agreed to cut this rate to 30 percent. The result has been a raft of trade wars between Washington and other governments, Beijing foremost among them.

 

Pain Without Gain

In the early nineteenth century, American traders began doing business with U.S. settlers in the kingdom of Hawaii. At the time, the islands’ economy revolved around sugar plantations, many of which were owned or controlled by American businessmen who exported sugar to the U.S. market. Eventually, to help the sugar farmers, the two countries struck the Reciprocity Treaty of 1875, which eliminated tariffs on Hawaiian sugar entering the United States. In response, Hawaii’s sugar economy boomed.

Initially, this deal worked reasonably well for Hawaii, which grew much richer from the exports. But it made the kingdom ever more dependent on the United States, which was able to exploit this reliance to its advantage. Washington refused, for example, to renew the Reciprocity Treaty unless Hawaii gave it exclusive rights to Pearl Harbor. American officials then eliminated tariffs on all foreign sugar in the 1890s and gave domestic producers a subsidy to shield the U.S. industry from foreign competition and keep prices low. This deprived Hawaii of its cost advantage. Hawaiian planters were crushed, increasing support among the islands’ U.S. elite for annexation. The elite’s push was successful, despite overwhelming opposition from the native Hawaiian population.

Hawaii was hardly the only country victimized by trade dependence. The United States and European countries had their investments in railroads, mines, and oil infrastructure in Mexico, after Mexico expropriated them both outright and through regulatory changes. Their banks and railways in China were attacked by the Qing dynasty. Western investments in Cuba were sabotaged under Spanish colonial rule. Perhaps most famously, Germany used its status as one of the largest importers of eastern European agriculture to gain political influence in that region before World War II.

These risks, in turn, suppressed overall economic exchange. No countries wanted to be conquered or coerced, so many of them steered clear of international commerce. The founders of the United States feared that economic dependence on the United Kingdom would give London undue influence even after they won the Revolutionary War, so they curtailed transatlantic trade. Qing China feared that trade dependence was a security vulnerability and likewise held back from global markets. Imperial Russia embraced autarky in the late nineteenth century to avoid vulnerability. In the 1930s, Japan went so far as to seize Manchuria to create an autarkic bloc that would supply Tokyo with raw materials without having to negotiate with the West.

In this rough-and-tumble era, trade wars were frequent and destabilizing. Sometimes, they helped produce outright conflict. The Smoot-Hawley Tariff Act of 1930, which raised U.S. tariffs on over 20,000 goods, prompted a global trade war that intensified geopolitical rivalries and helped push Germany, Italy, and Japan toward autarky and expansionism. Most famously, after the United States placed tariffs, embargoes, and export controls on Japanese oil, scrap metal, and aviation fuel, Tokyo struck Pearl Harbor in 1941. Trade tensions have featured in many other military conflicts, as well. Trade pressure and maritime coercion, for example, also helped lead to the War of 1812.

There still were bright moments for trade in the pre-WTO era, especially after World War II ended. In 1979, for instance, China and the United States normalized ties, and in 1980, the latter country granted the former permanent normal trade relations—preferential tariff treatment under U.S. law. But for two decades, the U.S. Congress had to vote yearly to renew China’s normal trade status, which legislators conditioned on Beijing making human rights and nonproliferation concessions. Although Congress always granted this status, the recurring uncertainty depressed trade and investment, as firms hesitated to engage deeply with a partner whose access to the American market could be revoked at any time. Economic actors, after all, require stable, predictable frameworks to make long-term investments.

In response, Beijing pushed to join the WTO from the moment it was created, hoping the body could guarantee Chinese manufacturers predictable global access. This effort sparked fierce debate within the United States about whether to permit accession. Advocates of integration argued that tying China’s economy to the world’s would deter China from launching military conflicts, lest it risk a cutoff, and encourage political liberalization. Opponents feared that economic integration before political liberalization would only strengthen an authoritarian competitor. Ultimately, the optimists prevailed: Washington allowed Beijing to join the WTO in 2001. The organization then alleviated China’s hold-up problems by prohibiting the United States from threatening tariff hikes each year. The Chinese economy, already expanding at a healthy rate, began to grow even faster.

For the WTO, Chinese accession was a triumph. The organization was created to increase trade everywhere and stop countries from using commerce as a weapon, and integrating the world’s most populous country (and a former U.S. adversary) suggested the body was having its intended effect. And at the time, it was—countries typically obeyed the WTO’s common rules, listened to its adjudicators, and played along with its enforcement tribunals. The resulting system was hardly perfect; it failed, for example, to stop China from using industrial policy as a means to promote specific sectors or companies, often at the expense of foreign firms, or from restricting exports to countries that criticized Beijing. But for the most part, the WTO was quite successful. Trade flourished, and the global economy grew more quickly than it otherwise would have.

 

Back to the Future

Then came the 2016 election of Trump. The president, always a critic of free trade, quickly went about abandoning and dismantling the WTO framework—taking opposition to the body to a whole new level. The United States, once the organization’s biggest champion, largely stopped listening to WTO guidance. It adopted trade practices that outright violated the body’s rules. And it paralyzed the organization’s appellate body in order to further weaken the system. Instead, Washington’s leaders reembraced a transactional view of trade, deploying tariffs as blunt instruments of punishment and coercion. Hold-up problems, once thought tamed, returned with a vengeance. Long-term investment and cross-border economic planning became riskier as geopolitical considerations reasserted themselves.

During Trump’s first term, these policies helped spur a more defensive posture by the United States’ trade partners. The EU, for example, devised new geoeconomic policies such as its anti-coercion instrument, which allows the bloc to respond to economic coercion by imposing tariffs, restricting access to EU markets, or suspending international obligations. China and the United States began to separate out investments. Such actions may well have suppressed both trade and foreign direct investment, although the declines in both are difficult to disentangle from the consequences of the COVID-19 pandemic. But even if Trump’s policies mattered little the first time around, that does not mean they will have trivial effects now. The first Trump administration featured many advisers who prevented the president from unleashing the kind of broad-based tariffs that he has implemented in 2025. Today, firms face even greater uncertainty. As a result, Chinese companies are already intensifying efforts to eliminate foreign components from their supply chains. So is the EU.

Trump’s tariffs are unlikely to help the U.S. economy. They will probably fail at their main stated goal—bringing manufacturing jobs back to the United States—because businesses will be reluctant to invest more at home when Washington keeps making and breaking trade agreements. The White House, after all, could instantly render whatever domestic factories companies build unprofitable by slashing tariffs. Trump also wants to use the leverage from the tariffs to compel countries to sign bilateral agreements with the United States, as was common before the advent of the multilateral trading system, but these deals will not do much to encourage investment, either. Unlike in a multilateral system, bilateral agreements are difficult to enforce and thus difficult for countries and firms to trust. In a bilateral system, trading partners also constantly worry that whatever agreement they sign with the United States will be undercut by a new deal between Washington and a different government. The result is even more uncertainty and thus less investment.

 

Tariffs lower the costs of military confrontation.

Trump’s trade war, in other words, will likely have similar economic effects as trade wars past. It could also have similar political consequences. Alliances may fray as countries look to hedge their bets, diversifying economic ties rather than simply trusting their partners. Governments will use tariffs to try to weaken competitors. Trump has already apparently used tariffs in an effort to annex Canada (in a strange redux of U.S. policy toward Hawaii), saying that Canada could avoid tariffs by becoming an American state and threatening “economic force” if it doesn’t. In response, Canadians have pivoted away from the United States, including by boycotting U.S. products. So have people in other countries; for example, overall favorability of the United States shave fallen across Western Europe since Trump won.

The United States is unlikely to attack any of these countries outright, although Trump has threatened Danish-controlled Greenland. But by reducing mutual dependency, his tariffs do lower the costs of military confrontation. If the United States reduces its economic reliance on Taiwanese semiconductors, for instance, Beijing might decide that Washington won’t respond if China blockades or invades the island. Conversely, in a more transactional world, countries could use whatever dependencies still exist to gain a political advantage—as Berlin did with agriculture in the 1930s. Russia, in particular, has long used such tactics by manipulating the price of oil and gas to extract political concessions from countries in its periphery, contributing to regional conflict.

Moscow’s tactics have naturally led many nearby states to diversify away from Russia. Now, similar tactics are also costing the United States. But should Washington lose its economic credibility, the result could be far more destabilizing than is the case for countries that do not trust the Kremlin. Washington’s ability to stand by its agreements has been the backbone of many essential global institutions, including NATO. It is a key reason the dollar is the world’s reserve currency. Without reliable frameworks, international politics will become more uncertain and volatile, making miscalculation and conflict more likely. The situation could start to resemble the lead-up to World War II, which partially resulted from the collapse of the League of Nations and the failure of European powers to nip German expansionism in the bud.

Trump may ultimately reduce some of his levies, particularly as he negotiates with more and more countries. He has already made a trade deal with the United Kingdom. But the president has abandoned the institutions and norms that once stabilized global trade. In doing so, he is risking an era not of renewed American strength but of stagnation, fragmentation, and danger. History, after all, shows that this is what trade wars create.

 

 

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