Trade War - Explained
What is a Trade War?
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Table of ContentsWhat is a Trade War?What Causes a Trade War?Types of Protectionist policiesTrade War Real World ExampleTrade War Advantages and DisadvantagesAcademic Research for Trade War
What is a Trade War?
In economics, a trade war refers to a conflict resulting from protectionism, where states increase or create new tariffs, leading to restrictions in international trade. A tariff is a tax that a country imposes on its imports. One country may increase the tariffs making other countries to retaliate in the same way. When trade war escalates, it negatively affects the economies of other nations. It can also lead to political tension between the two countries.
Back to:ECONOMIC ANALYSIS & MONETARY POLICY
What Causes a Trade War?
Protectionism results in a trade war when governments come up with policies and actions that restrict international trade. A government of a country implements protectionist actions to purposely shield domestic jobs and businesses from foreign competition. A country may also use protectionism to balance a trade deficit. A deficit in trade occurs when the imports of a country exceed its exports. Trade wars escalate when one country notices that its competitor is engaged in unfair trading practices. If that is the case, domestic trade unions will then resolve in placing pressure on politicians, to impose policies that will make imported goods less attractive to consumers. Such policies may lead to a trade war between the two countries. Apart from the hard policies, a trade war may also occur when there is a misunderstanding of free trades widespread benefits. A trade war is different from other control measures that governments impose on imports and exports, such as sanctions. Unlike trade war, other import sanctions dont have detrimental effects, when it comes to trading relationships between countries. The sanctions are specifically for trading purposes and not a tug of war. Sanctions can also have goals geared towards philanthropy.
Types of Protectionist policies
There are different protectionist policies that a country can impose on its imports. They include:
- Setting clear product standards
- Placing a cap on import quotas
- Implementing government subsidies that may discourage outsourcing
Trade War Real World Example
After his election to the office, as president of the United States, Donald Trump embarked on a protectionist campaign. The reason for doing this is that he wanted to bring back the manufacturing jobs which had been taken by other countries such as China through outsourcing. The president threatened to pull his country out of the World Trade Organization (WTO). WTO is an international entity with the obligation of regulating trade among the member countries. In the year 2018, the president turned against China, where he threatened to impose a big fine over a suspected intellectual property theft. He also threatened to impose significant tariffs on the Chinese products that amounted to $500 billion. Such products included soy and steel products. As a result, the two countries in that particular year continued to threaten each other. They even came up with several lists highlighting the tariffs they have proposed on specific goods. In September that year, the United States did implement 10% tariffs on specific goods. China responded by imposing its tariffs too. However, the duties that the American country imposed on certain goods did affect the Chinese economy a great deal. Manufacturers of the affected products did suffer, and there was also a slowdown in the Chinese economy. Come December, the same year, the two countries agreed to put a stop on any new taxes. However, in the following year (2019), the war on tariff continued. During spring, the United States and China found themselves on the verge of entering a trade agreement. In May 2019, a week before the two countries could get to their final talks, the officials representing China took a new rigid direction in their negotiations. They refused to make changes in their laws regarding company-subsidization. Instead, they insisted on lifting the current tariffs. President Trump took this as backtracking and hit back by increasing the tariffs from 10% to 25%, on any Chinese imports amounting to $200 billion.
Trade War Advantages and Disadvantages
Advantages There are several advantages resulting from a trade war. Some of the benefits are as follows:
- It protects the domestic manufacturers from unfair competition
- It increases the demand for domestic goods
- It improves trade deficits
- It acts as a punishment to those countries with unfair trade practices
- It promotes the creation of more local jobs
- There is a possibility of it increasing the cost of goods and causing inflation
- It may lead to shortages in the marketplace hence reducing choice
- A trade war may discourage trade especially the international trade
- A trade war can slow down the economies of nations, including those not participating.
- It interferes with diplomatic relations as well as the cultural exchange between countries
- Closed Economy
- Absolute Quotas
- Double Column Tariff
- Infant Industry Theory
- National Interest Argument
- Race to the Bottom
- Anti-Dumping Laws