The Cost of Retaliation: Lessons from the First Trade War and the Looming Threat to US Exporters 654

 in Blog by (updated 47 days ago)

President Trump’s recent tariff increases on Canada, Mexico, and China, along with the reimposition of national security tariffs on steel and aluminum, echo the trade conflicts of the past. History demonstrates a clear pattern: retaliatory tariffs from trading partners inflict substantial damage on American exporters, undermining their global competitiveness. As the US faces a new wave of retaliatory measures, the lessons of the previous trade war are more relevant than ever.

Agriculture: A Prime Target for Retaliation

During the initial trade conflict, agricultural exports, particularly soybeans and pork, bore the brunt of retaliatory tariffs, most notably from China. The resulting export losses were staggering, exceeding $27 billion in 2018 and 2019. USDA estimates revealed that China accounted for a staggering 95% of these losses, with the EU and Mexico contributing minimally.

To mitigate the financial hardship faced by agricultural producers, the US government provided $28 billion in direct relief payments across 2018 and 2019.

American Whiskey: A Case Study in Tariff Impact

The American whiskey industry also suffered significant setbacks due to retaliatory tariffs. The EU (including the UK at the time) imposed 25% tariffs on whiskey exports, which remained in effect for several years. Prior to these tariffs, American whiskey exports to the EU and UK totaled $702 million in 2018. The tariffs triggered a 27% decline in exports from 2018 to 2019, followed by an additional 15% drop from 2019 to 2020. Conservative estimates suggest that these tariffs resulted in $649 million in lost US whiskey exports to the EU and UK from 2019 to 2021. Exports remained below pre-tariff levels until 2023.

A New Round of Retaliation: $190 Billion at Stake

The current trade tensions have already elicited swift responses from US trading partners. In response to the US-imposed tariffs, China, Canada, and the European Union have announced or implemented retaliatory measures targeting $190 billion of US exports as of March 13th:

  • China (IEEPA): 10% and 15% tariffs on $13.9 billion of US exports (including agricultural equipment and oil) and another 10% and 15% tariffs on $19.5 billion of US exports (including agricultural products).
  • Canada (IEEPA): 25% tariffs on $20.8 billion of US exports and another 25% tariffs on $86.7 billion of US exports, along with a planned (currently suspended) 25% tax on electricity exports from Ontario to the US.
  • Canada (Section 232): 25% tariffs on $20.7 billion of US exports (including steel and aluminum).
  • European Union (Section 232): Resumption of previous tariffs (up to 50%) on $8 billion of US exports (including whiskey) and expansion of tariffs to an additional $20 billion of US exports.

The Double-Edged Sword: US Tariffs and Retaliation

The consequences of this renewed trade conflict are clear. Retaliatory measures will inevitably lead to reduced export sales and lost income for American businesses. Furthermore, US-imposed tariffs themselves can harm exporters by increasing input costs, effectively acting as a tax on exports.

Contrary to the notion that trade wars enhance the competitiveness of US businesses, they ultimately increase costs and trigger harmful foreign retaliation, making it more challenging for American companies to compete on the global stage. The lessons from the previous trade war underscore the importance of avoiding policies that disrupt trade flows and undermine the prosperity of US exporters.

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