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The Great Trade War : THE FACTS


BRUSSELS — A world trade war: The mere possibility sends shivers down the spines of economists and business leaders around the globe, who remember all too well that the last trade war accompanied the Great Depression of the 1930s.

Yet the risk may be greater than at any time since then.

"A trade war is totally out of the question except for the fact that it has a good chance of happening," says Bill Brock, the U.S. trade representative a decade ago and now a Washington c1869509493things."

Some of those little things may already be happening.

The new Clinton Administration is regularly threatening to close some U.S. markets to European goods if the European Community does not dismantle one trade barrier or another. The mounting 1429099310United States restrict Japanese imports unless Tokyo opens its markets. The EC, which also runs a huge trade deficit with Japan, has already tightened its limits on Japanese car imports.

Other dangers loom. Negotiations aimed at liberalizing world trade have been stalled for more than two years and could collapse if agreement is not reached by the end of this year. The U.S. Congress is moving to reinstate the President's power to act against nations that run heavy trade surpluses with the United States. The industrial world could be moving toward three trade blocs: the EC, East Asia and--if the North American Free Trade Agreement (NAFTA) wins congressional ratification--North America.

"A trade war," warns Jim Rollo, director of international economics for London's Royal Institute of International Affairs, "is something that will creep up on us."

U.S. Trade Representative Mickey Kantor, who is viewed by many in the industrial world as dangerously protectionist, insists that the last thing the United States wants is a trade war. His frequent threats of closing U.S. markets, he says, are meant merely to pry open foreign markets to U.S. goods.

But a senior official in Kantor's office concedes: "We're at a pivotal point. If things don't get better, they could go the other way. The stakes are pretty high."

A minority of economists find the prospect of a trade war less than alarming. Jeff Faux, president of the Washington-based Economic Policy Institute, says free trade means jobs go to low-paid foreigners instead of better-paid Americans. Manufacturers feeling hamstrung by U.S. environmental regulations move their production facilities overseas. Competition from abroad has all but wiped out some U.S. industries (consumer electronics) and devastated others (cars, steel, textiles).

"We just don't think that the world's economy and the fate of Western civilization ride on whether we have more trade or less trade," Faux says.

In the view of most analysts, however, trade wars have nothing but losers. True, some manufacturers profit temporarily because their domestic markets are shielded from foreign competition. But even these manufacturers lose out in the long run: They become flabby and unable to survive fair competition from abroad.

"The early stages tend to be, on balance, politically pleasant," says Gary Hufbauer, an analyst with the Washington-based Center for International Economics. "If we restrain imports of auto parts, there will be companies here finding sales picking up. . . . But the inefficiencies and high costs come back to haunt you."

In contrast, firms that rely on foreign markets suffocate during a trade war. The United States exported $448-billion worth of goods last year; economists estimate that as many as 13 million Americans owed their jobs to international trade in goods. And that does not count the $178 billion in exports of such services as movies, telecommunications, shipping and banking.

The Paris-based Center for Forecasting and International Information has analyzed the probable global consequences of a severe trade war. It assumed that total world trade would decline by nearly 20%--a substantial drop, but still far short of the two-thirds plunge during the Great Depression.

The center's analysts concluded that world economic output would be 15% lower in the year 2000 than it would be without a trade war. The countries that rely most heavily on trade would be hit the hardest: 23% less economic output in industrial Asia, 13% less in Europe and 7% in the United States.

"In reality," the center found, "all countries are losers at this game."

The London Business School assessed a relatively modest trade war between only the United States and Europe--one in which each side raised tariffs on the other's goods by 10 percentage points. The result, it found, would be a 1% reduction in economic output--enough to make the difference between slow economic growth and recession--and that prices would be almost 2% higher.

"These estimates are probably at the lower limit of likely effects," says Rollo. A serious trade war, he says, is likely to mean larger tariff increases and some import quotas, and it will probably involve Japan as well as the United States and Europe.

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