by Mark J. Higgins, C.F.A, C.F.P.
In response to Trump’s proposed tariff policy, Mark J. Higgins, financial historian, senior investment advisor, and author, offered the following insights.
At the present moment, there is far too much uncertainty to precisely gauge the effects of tariffs proposed by the incoming administration, but history does provide guidance on the nature of the risks. I will start by explaining the source of uncertainty. First, there is often a wide gap between what politicians say they are going to do and what they actually do once they are in office. Second, there is uncertainty over the actual effects of the tariffs once implemented. The complexity of trade and the lack of historical precedents from which to draw make this especially difficult to predict. Finally, the real danger of tariffs is a function of how trading partners react rather than the initial tariffs themselves. If the tariffs prompt a “tit-for-tat” series of responses, the ultimate effects could be far worse than originally anticipated. It is the tit-for-tat responses that explain why the trade wars in the 1930s were so catastrophic.
To be clear, I am not suggesting that Trump’s tariffs would be similarly damaging. After all, when the “beggar-thy-neighbor” trade policies of the 1930s took effect, the global economy was already in the midst of a devastating depression. Nevertheless, if there is a tit-for-tat dynamic, steadily escalating trade wars could damage economies by stoking inflation, disrupting trade balances, and reducing productivity by eroding the benefits of comparative advantage. In the most extreme circumstances, they also reduce barriers to armed conflicts because nations become less economically interdependent. Although the case was extreme in the 1930s, the trade wars of the 1930s were extremely damaging in the run-up to World War II, as I explain in my book, Investing in U.S Financial History: Understanding the Past to Forecast the Future. Ultimately, [the trade wars were] a classic, real-world example of the Prisoner’s Dilemma.”
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