Trade Wars

Trade Wars: A trade war is an international conflict involving protectionist measures between countries over goods and services. A trade war may start when a country applies import restrictions or increases import tariffs in opposition to another. For example, when then-President Donald Trump slapped several tariffs on Chinese imports, the U.S.-China trade war broke out in the middle of 2018. China increased tariffs on American goods in retaliation.

Trade wars can start when one country thinks another is not being fair in trade. Groups within a country, like trade unions or industry supporters, may push leaders to make products from other countries less appealing, leading to a trade war. Trade wars may be harmful to both countries’ industries and consumers. They may spread to impact other industries as well.

In this article, we will look into the meaning, history, impacts, list, examples, advantages, and disadvantages of Trade Wars in detail.

What is a Trade War?

An economic conflict between nations is called a trade war. This leads to the imposition of trade barriers by both countries as a kind of trade protectionist measure. Several measures, including import quotas, tariffs, embargos, domestic subsidies, and currency devaluation, may be used to create these obstacles. Every time one nation creates a trade barrier, the other nation will respond by enacting a different policy.

Trade wars frequently begin because a government in one nation feels that another is unfairly damaging its markets through trade practices. They might put in place a trade restriction, such as a tariff on an essential good imported from another nation, to protect their home sector or generate employment. This tit-for-tat conflict could turn into a trade war if the other nation retaliates.

History of Trade Wars

Trade wars have existed for centuries; the British Empire and colonial nations are two examples. To defend American farmers, the Smoot-Hawley Tariff Act of 1930 raised import charges, which provoked retaliation from other countries. President Roosevelt signed the Reciprocal Trade Agreements Act, which weakened trade barriers during the Great Depression. In 2018, Trump levied tariffs on a range of products, affecting Mexico, China, the European Union, and Canada.

Also, interim tariffs on US steel and other products were imposed by the EU and Canada. Tariffs on Chinese imports affected around $200 billion in imports by May 2019. China hit back, placing heavy tariffs on goods from the United States. The expenses of these tariffs are covered by US importers, as demonstrated by data from the International Monetary Fund, which brings up prices.

List of Trade Wars

There are many trade disputes and tensions ongoing worldwide. Below table mentions few of the trade wars:

Trade War	Countries Involved	Year(s)	About
U.S.-China Trade War	United States, China	2018-present	Initiated by the U.S. with tariffs imposed on Chinese goods, followed by retaliatory tariffs from China. Issues include intellectual property theft and trade imbalances.
U.S.-EU Trade War	United States, European Union	2018-present	Involves tariffs on various products like steel, aluminum, and agricultural goods. Disputes over subsidies to aircraft manufacturers are central.
U.S.-Mexico Trade War	United States, Mexico	2019-present	Tariffs were threatened and imposed by the U.S. to pressure Mexico on immigration issues, particularly illegal immigration into the U.S.
U.S.-Canada Trade War	United States, Canada	2018-2019	Primarily focused around tariffs on steel and aluminum imposed by the U.S., leading to retaliatory tariffs from Canada.
Japan-South Korea Trade Dispute	Japan, South Korea	2019-present	Dispute over historical issues led to trade restrictions, particularly affecting the semiconductor and display industries.
Australia-China Trade Tensions	Australia, China	2020-present	Various trade disputes including tariffs on Australian goods such as barley, wine, and coal, allegedly in response to Australia’s foreign policy stances.

How are Trade Wars Fought?

Trade barriers, which can take several forms, are used to fight trade wars. Even if there are several techniques to impose these restrictions, the end effect is usually the same. Some typical strategies used in trade wars include the following:

Tariffs

One of the most popular trade protectionist measures is tariffs. This means imposing taxes on imported goods. Tariffs increase the price of imported goods while generating income for the state. Tariffs are used as a protectionist measure with an assumption that domestic producers of the good being taxed will profit from less competition from imported goods. Toll wars or customs wars are other names for trade conflicts that specifically involve tariffs.

Import Quotas

A trade restriction known as an import quota limits the quantity of a certain good that can be imported. Quotas do not generate income for the government, in contrast to tariffs. Limits on a particular product lessen the competition that foreign producers present to domestic producers. The purpose of the quota is to protect these domestic producers.

Domestic Subsidies

The theory behind domestic subsidies is that the government can use them to allow domestic producers to cut the cost of items produced locally. This makes it easier for the domestic company to compete on price with outside markets. Reduced expenses for regional manufacturers lead to a decrease in imports and a rise in exports. When domestic subsidies are utilized in nations or sectors of the economy with high levels of exports.

Currency Devaluation

Another trade war strategy is to devalue the national currency with foreign currencies. Lower exchange rates increase the competitiveness of home exports abroad. Simultaneously, imports become less competitive in the home market and comparatively more expensive.

Embargos

An embargo is a severe measure that formally prohibits the exchange of a specific good with a nation. This can be used to restrict the good’s commercial activities or to completely prohibit imports and/or exports. Usually, the implementation of this policy is done so in protest.

Impacts of a Trade War on the Economy

There are two types of trade war effects on the economy: short-term and long-term.

Short Term Impact

Imposing trade barriers will typically succeed in short-term goal-oriented domestic business protection. But in a trade war, the opposing nation will impose its protectionist measures in retaliation. Frequently, the rules that are implemented help the domestic companies that are the targets of protection, but many other companies suffer because the foreign nation imposes restrictions on other commodities.

Long Term Impact

Most economists agree that trade wars damage economies over time, limit GDP growth, and generally reduce a nation’s ability to compete internationally. This is based on the theory of comparative advantage. Some of the increased charges that the government imposes on the importation of goods are transferred to the customer.

The domestic industries under protection aren’t producing at a lower cost than they were before the protectionist policy’s implementation, even if they are facing less competition. The product’s inefficiently high cost to customers causes consumption to decline, which in turn slows down the economy as a whole. Over time, this may result in a total decrease in the number of employments created.

Examples of Trade Wars

Few examples of trade wars are mentioned below:

1. U.S.-China Trade War (2018-present): Initiated by the United States, this trade war involves tariffs on hundreds of billions of dollars worth of goods between the two countries. The U.S. accuses China of unfair trade practices, intellectual property theft, and imposing barriers to entry for American companies.
2. U.S.-EU Trade War (2018-present): The United States and the European Union have engaged in a trade dispute over tariffs on various products, including steel, aluminum, and agricultural goods. The disagreement worsened with the imposition of tariffs on European steel and aluminum by the U.S., followed by retaliatory tariffs from the EU.
3. Japan-South Korea Trade Dispute (2019-present): This trade dispute originated from historical grievances between Japan and South Korea, leading to Japan imposing restrictions on the export of key materials used in the semiconductor and display industries to South Korea.
4. Australia-China Trade Tensions (2020-present): Trade tensions between Australia and China increased after Australia called for an independent inquiry into the origins of the COVID-19 pandemic, which China viewed as interference. As a result, China imposed tariffs and other trade barriers on various Australian exports, including barley, wine, and coal.
5. U.S.-Mexico Trade War (2019-present): The United States threatened and imposed tariffs on imports from Mexico as part of efforts to address immigration issues, particularly illegal immigration across the U.S.-Mexico border. This trade dispute was primarily aimed at pressuring Mexico to enhance its border security measures.

Impact of US-China Trade War on India

The trade wars between the United States and China have created certain opportunities for Southeast Asian countries. The Indian economy might also gain from this. India would find it very easy to access the global market due to this trade war:

• India may expand its commerce, especially in response to the high tariffs the US has placed on Chinese goods and services.
• China and the United States are two of India’s principal trading partners, and exports can close the enormous trade deficit.
• Investment flows in the automotive, agricultural, equipment, healthcare, electronics, and clothing industries should be more diverse to consider India as a reliable alternative location for production.
• To bring in foreign investors, India needs to speed up the implementation of creative governance practices and infrastructure projects.
• The only country in the world that can quickly meet market demands and match China’s operational scale is India.
• India can look for more opportunities in the areas of outsourcing, eCommerce, the chemical industry, information and communication technology advancement, and the automotive sector.
• China is more prepared than ever to give Indian exporters access to its markets, and these exporters are well capable of meeting demand from around the world.

Advantages of Trade Wars

The following are the advantages of trade wars:

• Defends native businesses against unfair competition,
• Raises the need for homegrown products.
• Encourages the expansion of local jobs.
• Boosts trade deficits.
• Punishes a country for its immoral trade practices.

Disadvantages of Trade Wars

The following are the disadvantages of trade wars:

• Raises prices and causes inflation.
• Lowers options and creates shortages in the market.
• Discourages commerce.
• Reduces the rate of economic growth.
• Damages cultural exchange and diplomatic relations.

Conclusion – Trade Wars

Trade conflicts and the imposition of trade barriers have advantages and disadvantages. Short-term protection for industries can be achieved by it. This can be especially helpful in protecting emerging or small businesses. In this case, protectionist policies can support these industries, which may be important to future domestic output. On the other hand, prolonged trade wars are usually seen negatively. Lower consumption and increased expenditures are the main causes of this. Trade conflicts can reduce industry competitiveness in addition to causing market inefficiencies. Since there is less competition in both nations, industries may feel less pressure to develop, which could lead to a stagnation of manufacturing technologies.

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FAQs on Trade Wars

What is a trade war?

When a nation retaliates against another by imposing import tariffs or other restrictions, it is said to be engaged in a trade war. Trade wars are divisive and a result of protectionist policies.

What is the cause of trade war?

Raising tariffs is the first step in starting trade wars. The taxes boost government revenue, impose trade restrictions, and protect homegrown producers from fierce rivalry.

What are the methods of trade war?

Tariffs, quota limits, or outright prohibitions on imports from the other nation are some of the instruments of a trade war. Other weapons include subsidies or subsidized credit for exports to the other nation or to third nations where the adversary is a rival.

What are the important trade wars?

A few trade wars are (i) The Empire’s Opium Wars, the First and Second, from 1839 to 1842; (ii) President Herbert Hoover’s Smoot-Hawley Tariff Act of 1930; (iii) The chicken wars of the early 1960s; and (iv) The US–Japan Automobile Trade War in the 1980s.

How is trade affected by war?

Trade embargoes, either partial or whole, on the interchange of products, are sometimes implemented when combined with military conflicts between nations.