Donald Trump's plan to impose big tariffs on foreign steel and aluminum has spawned lots of talk about a destabilizing global trade war that's an echo of the Great Depression, but the White House move is better characterized, for now, as a mere skirmish.
The real worry is the skirmish will metastasize into something far worse, especially in light of the president's mercurial approach to policy. Trump has tweeted that "trade wars are good" and "easy to win," warning of even harsher penalties if other countries respond in kind.
"The threat of retaliation and counter-retaliation is very real," said Edward Alden, a trade expert and senior fellow at the Council on Foreign Relations. The European Union has already drawn up a list of American-made products to target in its own shot over the bow.
Smoldering disputes over steel and a handful of other goods, however, are far from the raging fire that is a global trade war. That's why the world hasn't seen one in a very long time.
History of spats
Trade disputes — as opposed to trade wars — are common and long predate Trump.
The U.S., for example, only gets 2% of steel imports from China even though the Asian country produces about half of the world's supply. How come? The Obama administration hit Chinese steel with heavy tariffs in 2016 that sharply reduced imports, and those remain in place.
In another high-profile case, President Barack Obama applied tariffs to Chinese tires. Before that President George W. Bush instituted tariffs on some foreign steel products, and Bill Clinton did the same. And those disputes pale in comparison with some of the tussles fought by the Reagan administration with Japan over imported cars in the early 1980s.
A full-blown trade war, on the other hand, hasn't occurred in more than 80 years for a very simple reason: Countries understand the devastation that can result.
The last big trade war began during the early stages of the Great Depression in the 1930s as countries sought to protect their own industries and workers. Instead, the opposite happened. Sales fell, countless companies went out of business, and millions of workers lost their jobs.
The situation is dramatically different today from what it was back then.
The world economy, for instance, has mostly recovered from the last big economic crisis a decade ago, and it's growing at the fastest rate in years. The world economy is also more integrated, and support for free trade is arguably broader than ever.
"Outside of the U.S., the political and economic forces that fostered a global trade war in the 1930s do not apply," said Bill Adams, senior international economist at PNC Financial Services. "Global growth is strong, unemployment rates have recovered from the great recession, and prices are stable to rising."
Cost of tariffs
The president promised during the 2016 campaign to get tough with trading partners whose "unfair" policies, in his view, have caused huge U.S. budget deficits. Already, he's slapped tariffs on foreign-made solar panels and washing machines.
Trump appears to be going well beyond the strategies of past presidents, however, who applied more limited tariffs in pursuit of free trade.
Hence a growing backlash. The ostensibly pro-business president is getting hit from members of his own historically free-trade party and, more important, American businesses. Aside from the companies protected by the tariffs, every other industry has vocally opposed the White House trade strategy.
The resignation of Trump's top economic adviser, Gary Cohn, is a sign of stiffening resistance. The Wall Street veteran and devout free trader resigned after his arguments against the steel tariff fell on dear ears. His departure sent shock waves through Washington and Wall Street.
It's easy to understand why there's so much opposition. High tariffs on steel might protect the 140,000 or so workers directly employed by the U.S. steel industry, but at a high cost to consumers and other businesses. An estimated 6 million Americans work in other industries that rely on steel.
Economist Joe Brusuelas of RSM LLP said he figures the new tariffs on imported steel could force U.S. customers to fork over an additional $9 billion — plus. Even if 10,000 steel jobs were saved or created, the cost to the U.S. economy would be more than $900,000 per job.
It's those costs that have dissuaded previous presidents from Richard Nixon to Barack Obama from pursuing scorched-earth trade policies. Instead, they've sought to reduce trade barriers in other countries so U.S. companies could export more goods and services. After all, the U.S. typically has much lower tariffs than other countries.
Art of the deal?
Even as it talks tough, the White House has sent signals it's willing to deal.
Trump himself on Monday said he doubts we'll "have a trade war" and he suggested the tariffs are a negotiating tool to pressure Mexico and Canada into a quicker redo of the North American Free Trade Agreement. More surprisingly, he has hinted that he's open to eventually joining an Asian trade deal, the Trans-Pacific Partnership, which he pulled the plug on in his first year in office.
And while they've warned of retaliation, other countries appear likely to stick to a limited response as they have in past trade disputes with the world's largest economy.
The U.S. and Chinese, for example, still conduct hundreds of billons of dollars in trade each year despite repeated flare-ups. The dangers of escalation are too great even for an economic giant like China.
Still, the more aggressive strategy by an unpredictable president has everyone on edge. The Dow Jones Industrial Average (.DJI) tanked last week when the tariffs were announced and the anxiety has only grown in the wake of Cohn's resignation.
The stock market, too, could dissuade Trump from going too far. More than any president in modern times, he has tied the success of his presidency to rising stock prices. A real trade war would almost certainly put the market in reverse after a prolonged bull market.
"A trade war is now a higher risk, but it does not seem inevitable," said Paul Christopher, head of global market strategy at Wells Fargo Institute.