What is a Trade War?

What is a Trade War?

What is a Trade War? banner

A trade war is an economic conflict in which states increase trade barriers against each other, usually in the form of tariffs. The ultimate purpose of participating in a trade war is generally to improve imports or exports for the participating countries, and it can have significant impacts on international trade. However, increasing the cost of imports is a significant risk that often occurs when the involved nations refuse to compromise. Historically trade wars have led to military conflicts, although this is rarely the case in modern times.

What do Trade Wars Generally Involve?

Trade wars generally involve tariffs (taxes on imported goods), import quotas (limits on the quantity of imported goods), and other restrictions on trade. They are usually initiated in an attempt to protect domestic industries from foreign competition. However, trade wars often have unintended consequences, such as inflation, reduced consumer choice, and retaliation from other countries. In some cases, they can even lead to full-scale economic warfare. For these reasons, trade wars should be approached with caution, and international organizations like the World Trade Organization exist to mediate disputes and ensure fair trade practices.

Historical Trade Wars

The Anglo-Dutch wars are some of the best-known examples of trade wars that escalated into armed conflict. In the late 17th century, these naval engagements between England and the Dutch sought to establish who would control the seas, especially shipping routes, and become the world’s dominant trade nation. In the late 18th century, the two sides would fight again, this time over Dutch trade with the U.S. during the American Revolution. It was an economic disaster for the Dutch.

Eastern nations also participated in trade conflicts. The Opium Wars fought during the mid-19th century were caused by the opium trade and resulted in a significant loss of China’s territory, including the establishment of the British colony of Hong Kong.

This is by no means an exhaustive account of historical trade wars, but it does underscore the importance in which trade was held—nations were willing to go to war to ensure the success of their commerce enterprises.

Modern Trade Wars

The trade wars in modern times are less likely to result in actual wars, but their economic impact can be much greater than historical trade wars. The most significant trade war currently underway is the one between China and the United States, primarily because these countries have the two largest economies in the world. The U.S. initiated this conflict by increasing tariffs and raising other trade barriers to force China to change what the U.S. considers to be unfair trade practices. The U.S. government published the rationales for the tariffs in March 2018, which included the theft and forced transfer of U.S. intellectual property (IP) to China. This trade war has resulted in negative effects on the global economy, including slowing economic growth and disrupting supply chains.

The Chinese government has denied that the forced transfer of IP is a mandatory practice in that country and also acknowledges the impact of its domestic research and development. The current Chinese leadership in some technological areas is the result of an investment in basic science rather than the theft of IP from the U.S., according to former U.S. treasury secretary Larry Summers. The National People’s Congress has also endorsed a bill that explicitly prohibits the forced transfer of IP from other countries, which would take effect in 2020. Furthermore, China recently lifted foreign investment restrictions on its automotive industry in 2022.

How does a trade war impact me?

The first effects of a trade war are usually changes in employment rates, as industries experience growth or show declining growth depending on how they’re affected by the tariff. Consumer products are the most likely to be affected, although there is generally a period of uncertainty on prices as businesses determine how much of the tariff increase to pass on to their customers. A trade war can also impact the trade deficit of the involved countries, as tariffs can reduce imports and exports, leading to imbalances in trade.

Kevin DeJesus, Ph.D., assistant professor at Johnson & Wales University Providence and online said the impact to consumers is direct. “The issue of trade wars is a critical one to the consumers of society and those people who live every day trying to manage their daily budget. People are trying to balance that budget with what they have for income with the cost of items, foodstuffs, and the things that they need to buy for their kids like clothes and toys, cars, or any of these kinds of items. And when a trade war occurs, it is not a situation where increased competition drives prices down, it’s the reverse of that. It’s a situation where there is no ground for an amenable agreement on the taxes that one country imposes on another and vice versa in the exchange of goods, whether import or export. So this hurts the everyday consumer by a) driving up prices and b) causing, in some industries depending on how long the trade war goes on, a reduction in production, which could put jobs and businesses in jeopardy.”

Stock markets also experience greater volatility as a result of trade wars. For example, the Dow Jones Industrial Average dropped almost 600 points on December 4, 2018, which many analysts partially attributed to the U.S. trade war with China. Increasing trade tensions between the two countries was also largely responsible for the Dow’s 800-point drop on August 14, 2019. At the time, President Trump exhorted American companies to begin seeking alternatives to doing business with China on August 23, causing the Dow to drop by 223 points in five minutes.

The long-term effects of trade wars also include political changes. Higher tariffs on soybean exports to China had a particularly strong negative impact on U.S. farmers, which was an important constituency for then-President Donald Trump. President and General Secretary of China Xi Jinping faced similar political pressure from Chinese domestic interests in 2020.

Summary

Trade wars generally follow a pattern of escalating tariffs on products imported from opposing countries. This process often lasts for a long period of time, as the involved countries try to determine which side can withstand the most economic pain. A series of face-saving measures that look good on paper but have little economic effect are also common characteristics of prolonged trade wars.

According to DeJesus, “Trade wars are a very dangerous dance to engage in. They really can harm the everyday consumer far more than they will impact the country in which a trade war is being undertaken and tariffs are levied. It’s a failure of a political resolution to dispute over the exchange of goods.”

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