Warning: Trade Wars Carry Unintended Side Effects

The collateral damage in a U.S.-China fight could include Australia Brazil Guinea Iran Japan, Ukraine …

- Peter Coy

By threatening a tariff war with China, Donald Trump has essentially thrown a deck of cards into the air. We don’t know yet where each will land. While it appears that both the U.S. and China would suffer in a trade war, “the pattern of loss is going to be very difficult to predict,” says Jamie Murray, Bloomberg Economics’ chief European economist.

One of the most powerful laws in economics is the law of unintended consequences. As formulated by the American sociologist Robert Merton in a 1936 paper called “The Unanticipated Consequences of Purposive Social Action,” it says that consequences “are occasioned by the interplay of forces and circumstances which are so complex and numerous that prediction of them is quite beyond our reach.”

The law of unintended consequences strengthens the case for free trade by explaining that interventions in markets such as jacking up tariffs, however well intended, can make matters worse in ways that no economist or computer model can foresee. That’s not a counsel for inaction, but it’s a brief for stepping forward carefully. “History has proven that centralized industrial policy is not the most efficient way to run an economy,” says Thomas Derry, chief executive officer of the Institute for Supply Management, an organization of purchasing managers based in Tempe, Ariz.

It’s well understood that tariffs on imported goods raise prices for domestic businesses and consumers. Even President Trump, who has said trade wars are good and easy to win against countries that run big surpluses with the U.S., acknowledged their short-term downside on New York talk radio in early April, saying, “I’m not saying there won’t be a little pain.”