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.

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:

• Tariffs
• 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

Disadvantages

• 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

Related Topics

• Trade Balance: Surplus and Deficit
• Mercantilism
• J Curve
• National Trade Data Bank
• Capital Account (Economics)
• Merchandise Trade Balance
• Current Account 
• Income Payments
• Unilateral Transfer
• Is it better to have a trade surplus or a trade deficit? 
• Export of Goods and Services and Percentage of GDP
• Heckscher-Ohlin Model 
• Linder Hypothesis
• The Balance of Trade as a Balance of Payments
• National Savings and Investment Identity
• Circular Flow of Money
• Financial Capital
• Supply and Demand Sides for Financial Capital? 
• Flow of Capital
• Domestic Saving and Investment Determine the Trade Balance
• National Savings Identity and Trade Deficits
• How the Business Cycle Affects Trade Balances
• Trade Balance or Trade Surplus
• Level of Trade
• Comparative Advantage
• Absolute Advantage
• Specialization and Gain from Trade
• Absolute Advantage in All Goods
• Production Possibilities Frontier and Comparative Advantage
• Comparative Advantage and Mutually Beneficial Trade
• Gain from Trade
• Opportunity Costs and International Trade
• Intra-Industry Trade
• Splitting Up the Value Chain
• How Economies of Scale Lead to Trading Advantages
• Protectionism
• Closed Economy
• Tariffs 
• Double Column Tariff
• Import Quotas
• Double Column Tariff
• Infant Industry Theory
• National Interest Argument
• Race to the Bottom
• Anti-Dumping Laws
• Dumping
• Trade War
• Race to the Bottom
• Non-Tariff Barriers
• Effects of Trade Barriers
• Who Is Benefited and Who is Harmed by Protectionism?
• Infant Industry Theory for Restricting Imports
• What is the Anti-Dumping Argument for Restricting Imports?

• Anti-Dumping Laws
• Dumping

• What is the Environmental Protection Argument for Restricting Imports?
• Race to the Bottom
• Unsafe Consumer Products Argument for Restricting Imports?
• National Interest Argument for Restricting Imports
• What is the WTO?
• What is the GATT?
• What are Free Trade Agreements?
• North American Free Trade Agreement
• Central European Free Trade Agreement
• General Agreement on Free Tariff and Trade (GATT)
• Common Market
• Common Market for Eastern and Southern Africa
• Central American Common Market
• Caribbean Community and Common Market
• What are Economic Unions?
• WTO
• International Monetary Fund
• World Economic Forum
• Inter-American Development Bank
• Davos World Economic Forum 
• Chamber of Commerce
• Jackson Hole Economic Symposium