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Keynes’ warning and Trump’s trade war

Published: 05 Mar. 2025, 00:02

Chung Un-chan

The author, a former president of Seoul National University, is the chair of the Korea Institute of Shared Growth.

President Donald Trump’s tariff policies impose economic costs not only on America’s rivals but also on its allies and trading partners. Observing his approach, I am reminded of John Maynard Keynes’ 1919 work, “The Economic Consequences of the Peace.”

At 37, Keynes, then a Treasury official, attended the Paris Peace Conference as part of the British delegation tasked with drafting postwar reparations for Germany. The victors — France, Britain and the United States —demanded an astronomical sum of 132 billion gold marks (equivalent to $605 billion in 2025) from Germany. Keynes, however, argued that reparations should be minimized and that, in fact, the victors should support Germany’s economic reconstruction. His warnings went unheeded, and the punitive terms were codified in the Treaty of Versailles. Frustrated, Keynes resigned from the Treasury and authored “The Economic Consequences of the Peace,” a scathing critique of the treaty.

John Maynard Keynes (1883-1946). [NATIONAL PORTRAIT GALLERY]

At the time, France, Britain and the United States all opposed Germany’s economic recovery, believing that suppressing a former enemy’s development would secure their own prosperity. This logic echoed Rome’s treatment of Carthage after the Punic Wars in the second century B.C., when the victorious Romans obliterated their foe through territorial annexations and crushing reparations, ensuring its erasure from history. The victors of World War I effectively replicated this “Carthaginian peace.”

Why did Keynes reject this traditional notion of peace? He saw modern capitalism as an interconnected system in which economic development relied on interdependence among nations. As an example, he cited the 1870 Franco-Prussian War, in which the victorious Prussians imposed severe reparations on France. The immediate aftermath saw hyperinflation in France and a brief economic boom in Prussia, but ultimately, trade imbalances and the global financial panic of 1873 plunged Prussia into a fiscal crisis. Keynes understood that one nation’s poverty and inflation do not facilitate prosperity in neighboring economies.

Paris Peace Conference [BOOGLEBOOKS]

By Keynes’ assessment, a similar interdependent economic structure already existed between the victors and Germany after World War I. He foresaw that excessive reparations would trigger unprecedented inflation in Germany, leading either to socialist revolution or another war. History bore out his warnings: following a period of extreme hyperinflation, Germany fell under the control of the radical right-wing Nazi Party, culminating in World War II.

After World War II, the United States heeded these lessons. Unlike its predecessors, it refrained from imposing crushing reparations on Germany. In 1948, the United States implemented the Marshall Plan, an initiative closely aligned with Keynes’ proposals, to support postwar recovery through economic aid. This policy fueled Germany’s postwar “economic miracle” along the Rhine, solidifying its role as a pillar of capitalist economic growth. Keynes had advocated for this kind of inclusive, cooperative growth as a means to ensure long-term peace and prosperity.

President Donald Trump speaks in the Oval Office of the White House as he announces reciprocal tariffs, in Washington, DC, on Feb. 13. Trump announced that he would impose "reciprocal tariffs" on trading partners, opening new fronts in his trade war. The move would match U.S. tariff rates on imports to the levels that other countries impose on U.S. goods. [AFP/YONHAP]

The postwar global economic order — established through institutions such as the International Monetary Fund and the World Bank in 1945, the General Agreement on Tariffs and Trade in 1948 and the World Trade Organization in 1995 — ushered in an era of unprecedented global prosperity. Industrial production and global trade expanded significantly, a stark contrast to the Great Depression of the 1930s, which saw a collapse in world trade. This divergence underscores the fundamental difference between Keynesian peace and the Carthaginian approach.

Historically, the United States was not always a champion of free trade. In its early years, the young republic financed itself not through income taxes but through tariffs on foreign goods. For over a century after independence, tariffs accounted for more than 80 percent of federal revenue. Until the 1930s, the United States maintained steep tariffs — sometimes nearing 60 percent — to shield domestic industries and nurture its manufacturing sector. However, in the postwar era, America spearheaded global trade liberalization. While it profited from service-sector surpluses, its manufacturing sector suffered deindustrialization and mounting trade deficits.

Trump appears intent on reviving America’s manufacturing dominance by reverting to protectionism, mirroring policies from the country’s isolationist past. But whether tariffs — once effective in a less interconnected world — can rescue an America now deeply embedded in a complex global supply chain remains uncertain. Worse still, tariff wars risk escalating into broader international disputes, with dire geopolitical consequences.

Trump would do well to take a page from Keynes’ insights into the history of modern capitalism and the trajectory of postwar global political economy. If he truly seeks to restore American economic might, he should consider policies that foster interdependent growth rather than rekindling isolationist trade wars.

Translated using generative AI and edited by Korea JoongAng Daily staff.