Parallels to the 1930s: US trade policy could trigger global economic crisis

US President Donald Trump has repeatedly claimed that "trade wars are good and easy to win". However, the historical perspective suggests the opposite: "Our analyses of the 'mother of all trade wars' - the one that the US started in 1930 with the adoption of the Smoot-Hawley Tariff - show that it was not only harmful for the US, but for all economies worldwide," says Kirsten Wandschneider, Kiel Institute Fellow and co-author of the Kiel Policy Brief "Trade Wars and Currency Wars - Lessons from History".

The analysis is based on a new quarterly panel data set on bilateral trade flows in the years 1925 to 1938 for 99 countries, colonies and country groups. It contains more than 108,000 observations and covers the majority of world trade at that time.

Key American export goods were hit the hardest

The US Tariff Act of 1930 began with the goal of helping distressed farmers and then expanded into a rewrite of US tariff law. America's major trading partners responded to the aggressive tariffs with their own levies, import restrictions and boycotts of American goods.

As a result, US exports to countries that took retaliatory measures fell by up to 33 percent. However, US exports to countries that had only threatened retaliatory measures also fell by up to 22 percent. The decline was particularly pronounced for the most important American export products in terms of value, such as cars and agricultural products.

Trade and currency wars go hand in hand

Many countries also reacted to the global economic crisis by abandoning the global monetary system, the international gold standard. Between 1929 and 1936, more than 70 countries devalued their currencies against gold. In the face of this global currency war, international trade continued to decline. According to analyses, one country's trade fell by more than 21 percent after a devaluation.

"US President Trump has recently expressed the idea of strategically weakening the US dollar on several occasions. It is conceivable that countries today could also resort to devaluations if the trade war intensifies and global economic output falls," says Kris James Mitchener, Kiel Institute Fellow and co-author of the Kiel Policy Brief.

Europe can fill a global leadership vacuum

With the current tariff policy, President Trump has given up control of the global trading system, and the current US trade policy signals a departure from its 80-year leadership role since World War II, the authors say.

"To avoid the mistakes of the 1930s, Europe must fill the global leadership vacuum left by the US," says Mitchener. "Europe should signal that the euro is stable and a safe haven for investors, as China is also aggressively promoting the renminbi as an international trading, lending and reserve currency in the face of the turmoil on global markets caused by Trump."