Chinese and U.S. officials are talking trade again this week, with $16 billion in new U.S. tariffs about to kick off. But there is a far bigger concern brewing. China and the United States seem poised to compete for exclusive economic blocs reminiscent of the empires of old. Spoiler alert — that did not turn out well in the 1930s, when economic blocs sharply limited global trade. They are unlikely to work out better today.
Is the global trading order unraveling?
Starting with the General Agreement on Tariffs and Trade (GATT), the postwar trading order dramatically lowered tariffs and adopted the principle of unconditional most-favored-nation (MFN) — this means any trade concession granted to one country applied to all members of the GATT and its 1995 successor, the World Trade Organization. This system helped level the global playing field, allowing trade to expand rapidly and bringing prosperity to many citizens in many countries.
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Today’s tariffs and counter-tariffs are not the only problem — equal treatment also is increasingly at risk. History suggests the international economy could easily collapse into a series of economic blocs each dominated by a single great power — which is what happened during the Great Depression.
Here’s why economic blocs form
Unable to compete effectively at international market prices, protectionists seek barriers to limit imports into their home markets. This is well known. Frequently, however, these same protectionists also seek to export to foreign markets but require some form of privileged access.
This means special tariffs, once called “imperial preferences,” or subtle behind-the-border barriers to exclude competitors from third-country markets. Such deals violate MFN. Even free trade Britain took this approach when its industry started to decline from the mid-19th century; not only did the colonies apply lower tariffs on British goods than those from its competitors, but colonial administrators assisted British producers with favorable contracts for port, railroad and other infrastructure projects.
Special privileges for one country, however, mean discrimination against the goods of others. No country simply accepts discrimination against its goods in third-country markets. Excluded from one market, competitors seek their own privileged access elsewhere and form their own economic blocs, which then bias trade against the exporters from the first market.
Importantly, even the fear of exclusion can drive a spiral of economic hostility and closure. Each country sees its own pursuit of economic privilege as a response to the other’s pursuit of privilege, leading to the collapse of the international economy into exclusive trading blocs. As I have shown elsewhere, history is replete with examples of economic competition breaking down into such blocs. Indeed, the spiral and subsequent breakdown appear hard to avoid.
What does this mean for ‘Made in America’?
President Trump’s punitive tariffs aim to extract greater economic concessions from other countries. If successful, however, the United States is unlikely to share these concessions through the WTO and MFN — but will limit these to bilateral deals.
Especially worrisome are the exemptions granted to some U.S. allies, while higher duties went into immediate effect against economic foes. Though the U.S. quickly rescinded the exemptions, the fact they existed at all suggests the possibility of a two-tiered trading order — exactly the type of move likely to instill fears in China and others that the United States is pursuing an economic bloc.
In the spiral dynamic, in which each tit leads to the other’s tat, it is not so much the reality but the fear of future exclusion that causes the unraveling. Trump seems to look to keep everyone guessing — but the uncertainty created by his bargaining strategy may ignite fears of economic closure abroad, leading to greater economic hostility. This “madman” approach to negotiations, if successful, may get the United States slightly more at the bargaining table, but with the effect — whether win or lose — of instilling fear of the future into others and accelerating the move to exclusive economic blocs.
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And what does this mean for China?
China is already pursuing economic privileges in third-country markets, and this will probably increase in the future. The Belt-and-Road Initiative may have some trade-creating benefits over the long run, but — echoing British manipulations — to date the infrastructure contracts have gone almost exclusively to Chinese firms. Government subsidies, largely through loans that may never be repaid, also encourage Chinese state-owned enterprises to invest in politically unstable countries Western firms consider too risky, giving China a predominant position in those markets.
President Xi Jinping’s China 2025 industrial plan may create further trade tensions. Beijing wants to prioritize high-tech industries — but initially these companies will not be able to compete effectively against U.S. firms. To capture the necessary economies of scale, they will need to export beyond even the large domestic market. This can occur only through subsidies, for which China has already come under criticism, or by negotiating special access to foreign markets.
Fear goes both ways. The possibility China may obtain special privileges may be sufficient for the United States to consider forming its own bloc. In the present era of heightened economic tensions, the risk that the international economy will break down into exclusive economic blocs is growing. There are real issues to resolve in U.S.-China economic relations — but many reasons for leaders of both countries to proceed cautiously.
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Here’s where it pays to listen to history
The only successful economic leadership transition in modern history was between Britain and the United States. In the 19th century, Britain dominated trade in many corners of the globe. As Britain declined and the United States rose, the powers smoothly passed the baton of economic leadership by adhering to “open door” access. The United States eventually displaced Britain as the dominant economic power, with economic competition and hostility kept within bounds. This offers the hope that a collapse into exclusive economic blocs is not inevitable.
The United States and China are standing together on a fragile ledge — the consequences of a fall are not just higher tariffs on each other’s goods. Rather, history strongly suggests economic hostility and, especially, fears of market closure lead to the formation of economic blocs, which reduce trade even further. Either country can pull the other over the edge, igniting the downward spiral. Hopefully, calmer heads will prevail — and pay attention to economic history.
David A. Lake is the Gerri-Ann and Gary E. Jacobs Professor of Social Sciences and Distinguished Professor of Political Science at the University of California at San Diego.