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Will Trade Wars Become Real Wars?

July 27, 2018

In a trader's letter at Seeking Alpha, Nell Sloane says, “the prospect for protectionism and tariffs turning into currency wars, which then have a tendency to turn into hot wars, it is largely apparent this week things have certainly escalated.”


Jonathan Hillman of CSIS says about tariffs and trade wars: “the hazards could be even greater than anyone wants to admit. As protectionist sentiment rises, so does the risk of war.”


Will trade wars become real wars? 


“Trade wars” are fundamentally “Boss Games,” as we talked about A Spy’s Guide To Strategy. Trade wars are a battle for prominence within a Positive-Sum Game. Because every Positive-Sum Game is voluntary (as is trade), the loser must accept the winner’s rules, or else the loser will walk away.

 
Some say the loser walked away in the 1930s and that's what started World War II. Protectionism and tariffs after Smoot-Hawley forced Germany to walk away. That’s what caused a trade war to become the real war of World War II. 


While the causes of World War II were partly economic (the reparations of the Versailles Treaty), tariffs didn’t play much part.

 

Phil Mullan gives a summary of the true history of the 1930s. He shows that the U.S. and the world lowered tariffs after 1934: “By 1934 trade and tariff liberalisation was underway, with the US passing the Reciprocal Trade Agreements Act. This effectively repealed the Smoot-Hawley Act. Baldwin himself explains . . . that this ‘flipped the United States from a unilateral tariff setter to a reciprocal tariff cutter… from the mid-1930s right up to the end of the Second World War, US tariffs fell as did world tariffs – a fact that many modern accounts of globalisation miss’.”


If the 1930s isn’t a good example of “trade wars” turning into real wars, what is?

 

In fact, it's hard to say. 


In fact, there's a fundamentally more difficult problem. 

 

It's that that “trade wars” and real wars are fundamentally different things. 


A "trade war" is a “Boss Game.” It's a struggle for pre-eminence within a Positive-Sum Game.

 

A real war is a fight for something the other side possesses.

 
One way to tell the difference is whether each side sees a future Positive-Sum Game with the people they're playing with today.

 

If yes, it's a Boss Game.

 

If no, it's a Zero-Sum Game of conflict. Maybe, of war.

 

Boss Games can become Zero-Sum Games, like in the Arab Spring. But they don’t need to be.


When you ask the question of whether a "trade war" will become a real war, it's better to look at each side's full strategy.

 

Since every strategy ends with an Endgame, we start with each side's strategy and reason backward.

 
We look at what they need for their Endgame to exist, survive or expand. 


Every Endgame needs three things: 
1.    People, 
2.    Places, and 
3.    Things

 

Which means Zero-Sum Games just below Endgames are fought over people, places or things. 

 

The sequence of games looks like this: 

 In A Spy’s Guide To Strategy, we apply the framework to Bin Laden’s strategy. 


In the environment of “trade war,” we can apply the same framework to China, the EU and the U.S.


Is it likely that the most powerful players in the “trade wars” will start a Zero-Sum Game of real war to get what they need for their Endgames? 


Let’s look at each. 


For China, they have the people and the place for their Endgame to exist, survive and expand. Do they have the things? Do they have the food and energy resources? Can they get those things better through trade or real war? 


Clearly, through trade, even under less advantageous rules of trade. China prefers Positive-Sum Games of trade to Zero-Sum Games of war.


For the EU, they have the people and the place for their Endgame to exist, survive and expand. Do they have things like food and energy resources? For the most part, yes. For the things they don’t have, can they get them better through trade or war? 


Clearly, through trade, even under less advantageous rules of trade. The EU prefers Positive-Sum Games of trade to Zero-Sum Games of war.


For the U.S., we have the people and the place for the Endgame to exist, survive and expand. Do we have things like food and energy resources? Yes, in abundance. For the things we don’t have, we can get them better through trade than war. Positive-Sum Games of trade are better than Zero-Sum Games of war.


How likely is it that a trade war becomes a real war in the current environment? 


Not likely. 


Everyone with power in the current “trade war” prefers Positive-Sum Games of trade to Zero-Sum Games of war.


But there are tripwires to look for. 


We’ll talk about them in a separate post. 
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For more on this strategic framework, see A Spy's Guide To Strategy.

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