View from Glen Hill: The sad history of trade wars

President Trump’s announcement of his imposition of high tariffs on steel and aluminum encourages reflection on how the current system of international trade came into being in the aftermath of the tremendous worldwide upheavals and destruction of World War II.

Before that, in the carnage of World War I, much of an entire younger generation in Europe had been destroyed. Battles were fought on a scale never before experienced, with pitched battles so intense that casualties on a single day ran into the tens of thousands. At war’s end, an almost universal sentiment among the victorious allies demanded retribution in the form of onerous reparation payments be imposed on the losing side. The Versailles Treaty did just that and had the effect of destroying the German economy and bringing about enormous inflation there.  

At the same time, attempts at forming a League of Nations failed when our Senate refused to ratify the treaty that would have provided for U.S. membership. Simultaneously within the U.S., a great cry for the avoidance of foreign involvements arose and, with it, a growing desire for strong tariff barriers.

After the stock market crash of 1929, that trade protectionism took the very tangible form of the Smoot-Hawley Act of 1930. The act arose from fear of imports cutting internal American production as the Great Depression engulfed our country.  Smoot-Hawley raised U.S. trade barriers enormously and was soon matched by similar barriers erected in retaliation by the U.S.’s major trading partners. The result was a huge reduction in both world trade and domestic U.S. production that only ended for the U.S. with the massive ramping up in production that accompanied entry into World War II.

The economic upheavals in Germany, flowing in large measure from the consequences of the Versailles Treaty led, as we all know, to political and economic chaos there, followed by the rise of virulent national chauvinism that culminated in the Nazis’ assumption of power.

When World War II ended, leaders throughout the world and especially in the U.S. made it their central purpose to craft a post-war world in which the likelihood for further major wars would be greatly reduced. They remembered the hard lessons learned from the imposition of the Versailles Treaty and the Smoot-Hawley tariffs and vowed to do things differently. And to a very great extent, they did:

  • The U.S. adopted the Marshall Plan for reconstruction of war-torn Europe and extended that aid to defeated countries as well as to its wartime allies.

  • The U.S. not only joined the United Nations but also arranged for the U.N.’s headquarters to be in New York City.

The U.S. was a driving force in the creation of an array of treaties, conventions and other international agreements that established freer trade and a world financial and monetary system designed to stabilize currencies and governments so that the kind of hyperinflation and economic disruption that engulfed Germany after World War I was less likely to happen again. And they created many of these structures amazingly quickly after World War II ended.

By a number of measures, the world order that resulted has been very successful and has led to the time since World War II — despite many local and regional conflicts, of course — being one of the most generally peaceful periods among major powers in world history.

Into that picture creeps crafty Putin with the E.U., France, the U.K., Germany, Italy, Spain and Turkey having joined the U.S. as known victims of Russian election meddling. In fact, the Russians are demonstrating their mastery of how to fight a low-cost-to-them (as long as we don’t respond) war on one side while imposing huge costs societally as well as financially on the targeted country. That’s a brilliant asymmetrical-costs attack strategy to employ when one is, like Russia, an impoverished third-world country that doesn’t have the resources even to feed its own people or provide them with adequate healthcare.

Trade wars such as that provoked by the U.S.’ Smoot-Hawley tariffs in 1930 are the predictable consequence of major tariff-imposing moves and play into Putin’s hands.  Wholly apart from their adverse price impact on U.S. consumer goods, they create the kind of destabilizing pressures among our allies (and the rest of the world) that, for the entire post-World War II period, the U.S. has sought for every good reason to avoid.  We need to remember the lessons of the past and not start down a path presenting a predictably horrible outcome.