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Who Benefits from Trump’s Trade War?

Donald Trump’s trade war with China poses a serious threat to the US itself, which is bound to suffer severe losses due to trade diversion. But it may also lead to broader damage, as tit-for-tat tariffs reduce overall exports, undermine total global trade flows, and impede world economic growth.

TOKYO – In 1950, the Canadian-born Princeton University economist Jacob Viner explained a customs union produces a “trade creation” effect, as lower tariffs and non-tariff barriers spur increased flows of goods among member countries. But Viner noted that a customs union also generates a “trade diversion” effect, as countries that are not part of it face reductions in their trade with countries that are. By raising trade barriers with its major trading partners – especially China – the US now risks negative trade-creation and trade-diversion effects.

Of course, the US is not part of a customs union. But the trade creation and diversion effects can be seen, to varying extents, with any free-trade area – even an arrangement as broad as the World Trade Organization. So when, for example, US President Donald Trump withdrew from the Trans-Pacific Partnership – which is now moving forward as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership – it effectively doomed the US to a reduction in trade with the countries it deserted, as they increase trade with one another.

It is difficult to discern any redeeming qualities in Trump’s “America First” trade policies. But, to be fair, if not generous, there is some merit to challenging the status quo. Indeed, while it is a good idea to base policies on past experience, blindly sticking to tradition is a recipe for inertia. Instead, policymakers should be willing to take calculated risks and pursue pragmatic innovation.

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