First Shots of Trade War?

Will America’s weak dollar trigger a global trade war? The last trade war helped create the Great Depression.

If the crash of 1929 had been like previous ones, the subsequent hard times might have ended in a year or two. But instead, unprecedented economic meddling prolonged the misery for 12 long years.

How bad was the Great Depression? The following letters, written to President Franklin D. Roosevelt’s wife, convey the despair many felt as trade stopped, unemployment spiraled, banks collapsed and hunger spread across the nation.

During the four years after the 1929 stock market crash, the nation regressed like at no other time in its history. Forty-two percent of America’s banks folded. Production at the nation’s factories, mines and utilities fell by more than half. People’s real disposable incomes collapsed 28 percent. Stock prices cascaded to one tenth of their pre-crash height. Unemployment rose from 1.6 million in 1929 to a whopping 12.8 million by 1933—leaving one out of every four workers jobless. People lost their savings, their homes, their health and their hope.

But what made the 1929 stock market crash turn so much more deadly than the previous short-lived crashes of 1920 and earlier?

According to many economists, the 1929 crash was unique because just months later, the first shots of a trade war that quickly engulfed the world were fired.

Post-World War i industrial America, reeling from the effects of the stock market crash and subsequent job losses, erupted into protectionist fervor. In a reversal of conditions today, back then it was inexpensive European imports, especially agricultural products, due to cheap labor and falling European currencies, that began to undercut American producers.

Riding a populist wave, U.S. politicians imposed the Smoot-Hawley Tariff Act—one of the most draconian protectionist policies in America’s history. Designed to protect American farmers and manufacturers from cheap-labor low-cost European imports, Smoot-Hawley instead unintentionally triggered an economic arms race that helped plunge America—and the rest of the world—into a decade of depression and despair.

Historian Richard Hofstadter, with the benefit of hindsight, described the tariff act as “a virtual declaration of economic war on the rest of the world.” And that is just how the rest of the world saw it. Foreign nations were outraged. Within two years, 25 countries had retaliated; U.S. and foreign trade took massive losses. America exported $5.24 billion in goods in 1929; by 1932 the total had fallen to just $1.6 billion. Overall, world trade declined some 66 percent by 1934.

What does this all have to do with 2008 America? The first shots of global trade war are about to be fired—only this time, America’s falling dollar could be the trigger.

Ripple Effects

The dollar has fallen by 40 percent against the world’s major currencies over the past seven years. Sixteen percent of that loss has come in the past year and a half alone. Against gold, the dollar has fared even worse, losing 19 percent so far this year.

The rapid fall in the dollar’s value is drastically changing global trade dynamics. The immediate impacts are being felt most dramatically in Europe.

The drop may benefit America in the short run, even though in the long run there could be stinging political and economic consequences. For example, a falling dollar makes U.S. goods much cheaper when compared to foreign competition, thus boosting U.S. exports and dampening foreign imports. This is why the monthly trade deficit, which came in at a ghastly $56.5 billion last September, is beginning to improve and U.S. exporters are beginning to reap higher profits.

In Europe, however, things are quite the opposite. The falling dollar is hammering European industry.

The weak dollar means that European products have become more expensive in America, and consequently Europe is selling fewer goods to, and buying more goods from, the U.S. Thus, Europe is sending more money to America through trade, and America is sending less back to Europe.

But Europe is actually getting hit doubly hard because China loosely links its currency to the dollar. As the dollar has fallen, so has the Chinese yuan—thus, European exports have become more expensive in China too, and Chinese goods have become cheaper in Europe—the result being that Europeans are selling fewer goods to, but purchasing more from China—which means Europe is now losing billions in trade with China. During just the first eight months of 2007, the EU’s trade deficit with China ballooned 25 percent.

But it doesn’t stop there. Saudi Arabia also links its currency to the dollar. So as the dollar has fallen, so has the riyal, which means more trade losses for Europe. Twenty-one other nations, including Jordan, Venezuela, Belize, Qatar, Oman and Hong Kong, officially link their currencies to the dollar. Additionally, 12 more nations, including El Salvador, Ecuador and Panama, actually use the U.S. dollar as currency. Still more nations have currencies that tend to parallel the dollar’s value.

For these reasons, America’s dollar problem is the world’s dollar problem, and especially Europe’s problem. A huge chunk of the world’s currencies are depreciating against the euro.

No wonder Europe is getting fed up with the dollar’s slide.

“We consider that the euro area is not creating these global imbalances. … We cannot be the only ones that have to support the burden of adjustment,” Joaquín Almunia, European commissioner for monetary affairs, told the Chinese on a visit to Beijing in November. Almunia is not alone; rhetoric from other European leaders confirms that economic conditions are approaching critical levels on the Continent.

The upshot of this trend—which traces back to the falling dollar—is that the nightmare scenario is coming closer to reality.

Trade war alarm bells are ringing.

Signs of Trade War

As European businesses suffer, pressure on politicians to take legislative action to protect trade is intensifying. Airbus boss Tom Enders said the dollar’s fall is a “life-threatening” event for the company. France-headquartered Airbus, the world’s biggest plane maker, loses about €1 billion (us$1.5 billion) for every 10-cent rise in the euro versus the dollar. Munich-based bmw says it lost €666 million (us$972 million) last year because of the weak dollar. Multiply those losses by thousands of other companies across Europe, and the trade losses get huge really quickly.

Even in Germany, a nation whose many high-tech corporations are more insulated against currency fluctuations, tension is mounting. According to Stratfor, Germany is considering a French proposal to levy tariffs under the guise of environmental “green taxes” in order to pressure China to unlink the yuan from the dollar and allow it to rise (Nov. 29, 2007).

“The fact that the Chinese currency is depreciating against the euro … is creating a lot of problems for the European economy, and we could have as a result protectionism occurring in Europe,” Jean-Claude Juncker, head of the Eurogroup of finance ministers, said in Beijing, while on the same trip as Almunia in November.

But perhaps the strongest warning about a looming trade war comes from French President Nicolas Sarkozy.

Sarkozy, in a speech to the U.S. Congress on November 7, warned that America risked triggering “economic war” with Europe if it attempted to devalue its way out of economic trouble by allowing the dollar to plunge in value. “Those who admire the nation that has built the world’s greatest economy and has never ceased trying to persuade the world of the advantages of free trade expect her to be the first to promote fair exchange rates,” Sarkozy said. “The dollar cannot remain solely the problem of others. If we’re not careful, monetary disarray could morph into economic war. We would all be its victims.”


At the same time, the falling greenback, while stimulating U.S. exports, is also increasing calls for trade protectionism from within America.

When the dollar falls, U.S.-denominated assets become cheaper—and foreigners are now beginning to take full advantage of the markdown sale in America—not just of toys and trinkets, but of strategic assets as well. Europeans, Chinese and Arabs are grabbing U.S. infrastructure at a rapid pace. Stuffed to the brim with depreciating dollars, many investors are seeking to spend them before they become worth even less (see sidebar).

As America has witnessed the foreign nationalizing of corporate usa, voter angst has grown, and politicians are feeling pressured to stem the tide. This election year, demands to legislate protections for American assets and trade are sure to increase. Calls to levy tariffs, duties, quotas, subsidies, and even to outright prohibit foreign ownership, are almost sure to abound.

And perhaps with good reason. America is losing billions in trade each year. Furthermore, how much strategic infrastructure does America want to be foreign-owned? When times are good and everyone is at peace, foreign ownership of strategic industry may pose little immediate threat. But given the rising global tide of anti-Americanism, is it wise for America to allow foreign nations to have unrestricted access to American assets?

Then again, trade protectionism in America or Europe could easily escalate into an economic arms race where nations turn inward and erect barriers to benefit local businesses and prevent foreign entities from competing. In such a scenario, global trade would immediately begin to regress, taking stock markets with it.

America does not need a trade war, especially now. The economy is already teetering on the edge of recession. America’s manufacturing industry is atrophied, the housing market is collapsing, the banking industry is experiencing losses that will probably number in the hundreds of billions of dollars, and real inflation is far higher than government statistics suggest. A trade war would quickly put an end to any short-term economic stimulus that a falling dollar might provide.

Yet, Bible prophecy shows that America will be besieged by trade war in the near future.

In a letter dated May 16, 1985, Herbert W. Armstrong, then editor in chief of the globally circulated Plain Truth magazine, described this prospect: “Slowly but surely events are working toward a coming conflict between Europe and the United States as prophesied in the Bible. U.S. Secretary of Labor William Brock has issued a public statement threatening a trade war between the United States and Europe. All these events are tending to drive Europe and the U.S. further and further apart. Trouble is definitely on the horizon as God has forewarned in prophecy.”

Leaders in America and Europe say they don’t want a trade war. Most economists and business leaders don’t want trade war, and the average worker certainly doesn’t want trade war—after all, nobody likes to be reduced to begging for clothes or to being unemployed. With trade wars, everybody loses. The question just becomes who loses the most.

The Bible says trade war is coming—eventually resulting in the worst depression America has ever witnessed. Evidence of it is mounting. Will the falling dollar be the trigger?