A trade war happens when one country retaliates against another by raising import tariffs or placing other restrictions on the other country’s imports. Trade wars can begin if one country perceives another nation as having unfair trading practices. Domestic trade unions or industry lobbyists may push politicians to make imported goods less attractive to consumers, steering international policy towards a trade war. Often, trade wars are also a result of a misunderstanding of the broad benefits of free trade.
Key Takeaways
- A trade war occurs when one country retaliates against another by raising import tariffs or placing other restrictions on the other country’s imports.
- Trade wars are often a side effect of protectionist policies and are controversial.
- Advocates argue that trade wars protect national interests and provide advantages to domestic businesses.
- Critics claim that trade wars ultimately hurt local companies, consumers, and the economy.
Deep Dive: What is a Trade War?
Trade wars are typically associated with protectionism, which involves government actions and policies that restrict international trade to protect domestic industries. A country may adopt protectionist measures to shield domestic businesses and jobs from foreign competition, balance trade deficits, or react to unfair trading practices by other nations.
A trade deficit occurs when a country imports more than it exports. Tariffs are taxes or duties imposed on imported goods. In a global economy, a trade war can severely affect consumers and businesses in both nations, potentially causing economic damage.
Trade wars can escalate from one sector to multiple sectors, impacting various industries. Additionally, a bilateral trade war can drag in other nations, amplifying the economic shockwaves worldwide.
Beyond tariffs, protectionist policies might include import quotas, product standards, and government subsidies to deter outsourcing.
Historical Context: Examples through Time
Trade wars are not a new phenomenon; they have been happening for as long as nations have traded. Let’s explore some historical examples:
The Opium Wars
In the 19th century, the British Empire fought with China over the illicit trade of opium. Despite Chinese resistance, the formidable British navy forced China to allow more foreign trade.
The Smoot-Hawley Tariff Act
In 1930, the United States raised tariffs under the Smoot-Hawley Act to protect American farmers, resulting in widespread global retaliation and worsening the Great Depression.
The U.S.-China Trade War
Starting in January 2018, the United States, under President Trump, imposed tariffs on a range of imports from the European Union, Canada, China, and Mexico. Each retaliated in kind, escalating global trade tensions. By 2019, tariffs on Chinese imports involved nearly $200 billion worth of goods.
Recent Developments
Despite a phase one trade deal in early 2020, the U.S. and China remain cautious due to ongoing grievances, notably intertwined with the global COVID-19 pandemic’s impact.
Advantages and Disadvantages of a Trade War
The debate over the merits and drawbacks of trade wars and protectionism remains intense:
Pros:
- Protects domestic companies from unfair competition
- Increases demand for domestic goods
- Promotes local job growth
- Improves trade deficits
- Punishes nations with unethical trade practices
Cons:
- Increases costs and induces inflation
- Causes marketplace shortages and reduces choice
- Discourages trade
- Slows economic growth
- Hurts diplomatic and cultural relations
Critics of protectionism argue it can harm those it’s meant to protect by restricting markets and slowing economic and cultural exchanges. Price increases from tariffs can lead to inflation and lower consumer choice.
Case in Point: The U.S.-China Trade War
One high-profile example is the trade war between the U.S. and China, catalyzed by President Trump’s 2016 campaign promises and subsequent policy actions to bring jobs back to the U.S. and penalize illegal Chinese trade practices.
In 2018, President Trump threatened severe tariffs on Chinese imports. China retaliated, escalating the conflict throughout the year. By the end of 2018, some semblance of a trade thaw occurred, but not before significant economic impacts on both sides.
A new hard line in negotiations in 2019 led to increased tariffs on many goods, yet concessions on both sides eventually led to a brief agreement in 2020—complicated further by the pandemic.
Understanding the dynamics and implications of trade wars helps in grasping their far-reaching economic and political effects. The aim should be to foster balanced, fair international trade policies that benefit all participating countries.
Related Terms: tariff, protectionism, trade deficit, free trade, sanctions.
References
- United States Senate. “The Senate Passes the Smoot-Hawley Tariff”.
- Corporate Finance Institute. “Smoot-Hawley Tariff Act”.
- Harley Davidson Inc. “Harley-Davidson, Inc. to Vigorously Defend Its Position Following Aggressive EU Tariff Ruling”.
- Tax Foundation. “Tracking the Economic Impact of U.S. Tariffs and Retaliatory Actions”.
- International Monetary Fund. “The Impact of US-China Trade Tensions”.
- The White House. “Fact Sheet: United States Imposes First Tranche of Swift and Severe Costs on Russia”.
- World Trade Organization. “Members and Observers”.
- Office of the United States Trade Representative. “Rebalancing United States-China Trade”.
