Will Higher Tariffs on Chinese Goods Start a Trade War?

The election of Donald Trump to the United States presidency has shocked the world. As the new President prepares to take office Forex traders are considering the statements that Mr. Trump made during his campaign in regard to trade with China. He has said that China has been and is taking advantage of the U.S.A. in trade and that he will raise tariffs substantially on Chinese goods in retaliation. Will higher tariffs on Chinese goods start a trade war and how would that work out for the US dollar and the Yuan? Bloomberg says that China watchers greet Trump with trepidation due to their concern of trade risks.

Donald Trump’s victory in the U.S. presidential election is giving China watchers something new to worry about – the threat of a trade war between the two largest economies.

Before the poll, Trump made his position clear: China was a “grand master” at currency manipulation and was stealing American jobs. He threatened punitive tariffs of up to 45 percent on the country’s imports, a step that Commonwealth Bank of Australia estimated would cut China’s shipments to the the U.S. by 25 percent in the first year. George Magnus, senior independent economic adviser at UBS Group AG, says the $11 trillion Asian economy stands to lose from a more protectionist America.

This would be an especially bad time for China to get into a trade war with the USA as its leaders attempt to deflate a property market bubble and deal with huge and growing public and private debts. But how would a trade war with China, and Mexico, work out for the USA?

What Finally Caused the Great Depression?

The U.S. economy has come back from the Great Recession but still has a ways to go. Would a trade war with the world’s second largest economy work out well for the U.S.A? If we look at the worst economic disaster in U.S. history, the Great Depression, we find that the final cause was not the stock market crash of 1929 but the Smoot Hawley Tariff Act that provoked a global trade war. The Washington International Trade Association asks did the Smoot-Hawley tariff cause the Great Depression.

Eighty four years ago on this day President Hoover signed the now-infamous Smoot-Hawley tariff bill, which substantially raised U.S. tariffs on some 890 products. Other countries retaliated and world trade shrank enormously; by the end of 1934 world trade had plummeted some 66 percent from the 1929 level.

Those who blame Smoot-Hawley [say] that the drop in exports was significant. From 1929 to 1933 American exports declined from about $5.2 billion to $1.7 billion, and the impact was concentrated on agricultural products such as wheat, cotton and tobacco. As a result, many American farmers defaulted on their loans, which in turn particularly affected small rural banks.

Today, the Smoot-Hawley tariffs represent a cautionary tale. Regardless of whether they were the major cause of the Great Depression or not, they definitely were a truly terrible idea. In today’s world where Central Banks have been pumping out liquidity and inflating stocks, similar to the case in the 1920s, we must hope that we don’t repeat the mistake of Smoot-Hawley.

Will higher tariffs on Chinese goods start a trade war and could that drive the U.S.A. back into recession? Forex traders will need to follow this issue as it could have a huge impact on the value of the U.S. dollar.