Trade war
Key Takeaways
- A trade war refers to a bout of hostility between countries using their trade relations as the ammunition
- Trading countries resort to trade wars by raising tariffs, duties on imports or banning imports
What is a Trade War?
A trade war refers to a bout of hostility between countries using their trade relations as the ammunition.
Trading countries resort to trade wars by raising tariffs, duties on imports or banning imports from each other for one-upmanship.
The reasons for a trade war could range from disputes in geopolitical relations or trading relations, or protectionist and nationalist sentiments of one country, safeguarding domestic industries and jobs.
History of Trade War
Trade wars are not new for the global economy. Such conflicts have been existing for as long as the countries are having trade with each other. During the 17th century too, various colonial powers had conflicts with each other to gain exclusive rights to trade with overseas colonies.
The British empire also has a history of trade battles. An example of the same is the opium trade wars with China in the 19th century.
Another example of the ancient trade wars is when the US imposed the Smoot Hawley Tariff Act, which raised the tariffs of European agricultural products to help the American farmers. The most recent example is the US-China trade war that has taken the global economy on toll.
The Pros and Cons of Trade War
The pros and cons of trade war on the basis of protectionism and other factors are the subjects of ongoing debate.
Believers of protectionism say that having a protective policy that discourages imports favours the domestic players thus increasing employment for their citizens. They say that these policies also help in overcoming the trade deficit. Other proposed advantages of the protective policies are:
· Increase in the demand for the local products
· Trade deficits are reduced
· Protects local companies from excessive and unfair competition
· Promotes local employment
· Punishes countries with unethical trade practices
Opponents of protective policies argue that such policies hinder the growth of the country and are against consumerism as it does not give much choice to the customers. The disadvantages of protective policies as proposed by the opponents of protective policies are:
· Increase cost and inflation
· Discourage trade
· Against consumerism
· Cause marketplace shortages
· Slows economic growth
· Hampers diplomatic relations
Real World Example: The US China Trade War
Ever since 2016, President Donald Trump has been showing his disdain against the huge trade deficit that the US is having with the other countries. Even when he was contesting for the elections, he promised to decrease outsourcing of jobs to foreigners and to bring back jobs to the local citizens.
In 2018, the US president started executing his protective policies, mainly against China. The US imposed a huge fine on China stating intellectual property theft. In retaliation, China imposed a 25% tax on more than 100 U.S. products. Throughout the year, both the countries continued threatening each other with imposing multiple tariffs. It significantly affected trade of both the countries.
In December, both the countries agreed to halt the imposition of new tariffs. But the trade war again started in 2019 and since then it is happening on an intermittent basis.