A trade war is an economic conflict that happens as a result of extreme protectionism.

Protectionism occurs, when a country creates or increases tariffs (tax imposed on imports of goods and services) and trade barriers against another country in retaliation to the trade barriers created by the other country.

A trade war usually starts when a nation makes attempts to protect her domestic industry and create jobs.

If this goes on for a short while it may not cause any trade friction between other countries but if it lingers it may degenerate into a trade war.

In order for a country to boost its domestic industry, the country will place tariffs on the import of goods; these tariffs are meant to give a competitive advantage to the domestic industries that produce the product.

The price of these domestic goods will be cheaper when compared to imported goods.

Due to the fact that the domestic prices of the goods are cheaper, there will be an increased demand for domestic goods more than imported goods.

This increase in the demand for local goods will cause a boost in the production of domestic goods and lead to the creation of more jobs.

When another country that supplies the same goods notices that tariffs or trade barriers have been set up against the importation of their goods to the country, they may want to retaliate.

This is especially if the trading practices are considered unfair or if the domestic trade union of the other country pressures politicians to make the imported goods look less attractive and unappealing to the consumers.

The misunderstanding that ensues after this can cause friction between the two countries and if it lingers for long, the country on whose goods tariffs have been placed can decide to retaliate and do the same to the goods of the other country.

Once this happens a trade war is around the corner.

A trade war in one sector can spill to other sectors in a country’s economy.

The effects of trade wars are spread across various sectors of a nation like the chart below shows of the trade war between the United States and China.

tariffs

Source: BBC

Also a trade war that begins with just two countries can spill over and start to affect other countries that were not initially involved in the war.

The war always spills over to other countries that have allegiances with each of the two warring countries.

If for example Country A is involved in a trade war with Country B. The nation’s that are in alliance or in trade partnership with the two countries may be forced to also take retaliatory steps against the country that is against their ally.

If country D is the friend of country A; it can place trade restrictions and tariffs on imports from country B. This chain reaction is usually to show support and solidarity to their allies during the war.

The trade war between countries can also make countries to form new trade alliances.

If for example, Country A places high tariffs on the products from country B, then country B will be forced to look for another country that it can enter the same trade agreement with either on a long term or short term basis.

WHAT IS PROTECTIONISM?

As stated earlier, protectionist penchant is the major cause of a trade war. You may be wondering what Is protectionism.

Protectionism refers to government policies and actions that restrict international trade. The major intention of this is to protect local business and jobs from foreign competition.

A lot of arguments have been on as to whether or not protectionism is of any benefit to the people. Critics of protectionism say that even though it is intended to benefit the people, it is detrimental to the people, especially in the long run.

For example, a survey was carried out with regards to if Americans believe that China would retaliate to the tariffs imposed by the government and over 74% stated that China would retaliate. They were not wrong. Not only did China retaliate but other countries as well.

China US Tarrifs

Source: YouGov

They argue that it can slow down the cultural exchange and economic growth. It also leads to an increase in the price of manufacturing goods domestically.

On the other hand, proponents of protectionism are of the opinion that if the policies are well crafted, it provides a competitive advantage and also creates more jobs.

Protectionist policies are not just implemented via tariffs, they can also be implemented through by setting clear product standards, placing a cap on import quotas and also implementing government subsidies to deter outsourcing.

An example of this is when President Donald Trump of the United States of America embarked on a protectionist campaign in 2017 and 2018 which was geared towards bringing back manufacturing jobs to the United States instead of outsourcing from India and China where the US has been known to outsource from for many decades.

This is what has degenerated to the ongoing trade war between China and the United States.

DIFFERENCE BETWEEN A TRADE WAR AND SANCTIONS

It is important to note that a trade war is different from other actions like sanctions specifically related to trade that have detrimental effects on the trade relationship between two countries.

Such actions may also have other goals like humanitarian goals. They are mostly taken when a country disobeys the rules or regulations of a country concerning import, this disobedience can be in the aspect of the standard of the imported goods or any other regulation that is flouted.

Such sanctions should not be mistaken for a trade war. The sanctions are usually justified and the country that is sanctioned knows that it deserves the sanction.

In as much as the actions and tariffs that degenerate into a trade war are aimed at improving the economy of a country, if the trade war continues for a long period of time, it can have adverse effects on international trade.

To further understand these adverse effects of trade wars, let us consider the implications of a Trade War.

IMPLICATIONS OF A TRADE WAR

As stated earlier, a trade war can have certain effects on the countries involved and even on the global economy especially if it lingers for too long. Below are some of the implications of a trade war.

1. Increased Cost of Goods and Services

The tariffs that are placed on goods and services during a trade war can lead to an increase in the price of goods and services and this can affect the economy negatively. High prices from tariffs can hurt firms and consumers in the countries involved.

The first prices to rise during the trade war are the goods in the sector with tariffs.

Once these prices increase, the prices of other products will follow suit thereby putting the economy in a tight spot.

When tariffs are placed on imported goods, the prices of the goods increases because of the tax imposed on them, when the prices of these imported goods increase, the domestic manufacturers who do not pay tariffs begin to charge higher prices for their domestically produced goods too.

Even though domestic manufacturers make more profit which they can invest in other factories, it has an adverse effect on the consumers.

This how in price puts a strain on consumers and companies that buy intermediate products and this can harm the economy.

2. Consumer Financial Strain

Tariffs that target consumer goods can put direct pressure on the finances of the citizens of the countries involved.

If the tariff is on intermediate goods and industrial products, it won’t affect the citizens as much as tariffs placed on consumer goods.

These tariffs on consumer goods also threaten the retail industry by causing an increase in the retail prices to consumers this is due to the fact that retailers won’t be able to absorb the cost of the tariff.

The high tariffs could mean that suppliers will receive fewer supplies, or consumers will pay more or consumers will buy fewer products or the retail margins will be low or consumers will totally forgo the purchase of the products.

Either way, the budgets of consumers will be stretched and the shopping bills of consumers will get higher and this will affect the economy.

Retaliatory tariff also affects farmers; this is because trade wars also interfere with the plans of the farmers for the future.

The escalation of tension during trade wars causes a reduction in the ability of farmers to sell their goods and this causes them to make long term decisions that will affect their farms.

3. Global Economic Crisis

Trade wars especially can adversely affect the economy of the world.

These effects can be felt in three different ways:

First, a trade war can lead to a reduction in productivity; this reduction is due to the changes in the allocation of productive resources.

Secondly, a Trade War could lead to a rise in the financing cost of capital which is caused by the financial stress the country undergoes during the war.

Finally, a trade was can lead to a reduction or drop in investment which is due to the increase in uncertainty or fear of the future of business conditions. A lot of firms and investors would rather wait and see what happens than invest their money in an unstable economy.

If investors start reducing their investments or people start moving their supply chain around, then the economy will be badly hurt.

The tariffs during trade wars may look harmless at the initial stage but in the long run, it will lead to laying-off people from their jobs, this will leave people devastated and their hopes and optimism shattered because the hope of getting any meaningful work will be gone.

EXAMPLES OF TRADE WARS AND ITS SIGNS

Steel Tariffs and the European Union Trade War

In March 2018, the President of the United States Donald Trump stated a 10% tariff on aluminum and 25% tariff on all steel imports. Even though Trump further said “Trade wars are very easy to win“, the markets revealed something else.

Stock markets began to fall all around the world, due to the fear of the trade war about to happen between 3 of the world’s biggest economies.

Although the United States Congress is the only arm of the government given the full legal right to enforce traffics, Donald Trump exercised a special power which was granted to the presidency in 1962 by the Congress.

This permitted the curbing of imports by the president when these imports are believed to threaten the security of the nation. And this was the case, as The Commerce Department announced that due to reliance on imported metals, the United States ability to create weapons was threatened.

However, the Aerospace Industry Council begged to differ stating that Trump’s tariffs would rather multiply costs for exporters and the military.

Now, after these moves by the U.S President, 8 nations, 5 of them allied to the United States filed complaints against the country. These countries included Switzerland, Mexico, India, the European Union, Norway, Canada, Russia, and China.

China one the major players of the steel industry imposed a $3 billion tariff on all American products in June 2018, which unleashed a circle of retaliation as the chart below shows.

US/Chinese Trade War

Source: Statista

a.) The EU Trade War

The American government initially wanted to delay the tariff on all European Union imports for the 1st of June 2018. This was because Donald Trump required the United States ally to take off its 10% tariff on all American autos, as well as setting quotas on all its steel exports.

However, on the 31st of May, 2018, the President of the United States said that the tariff would be placed on Mexico, the European Union, and Canada. The American Aluminum Associated announced that this move would cause chaos in the supply chains which over 97% of all aluminum industry jobs in the United States rely on.

Germany then proposed to stop the European Union’s 10% tax on all American auto imports. In turn, the U.S must not impose a 25% tax on all auto imports from the EU.

However, on the 22nd of June, 2018, the European Union placed tariffs on American products of up to $3.2 billion.

These tariffs were directly aimed at imports which would affect the political base of Donald Trump, such as orange juice, bourbon, and motorcycles.

However, various other sectors were vulnerable to the trade war as seen in the image below.

bruegel

Source: Bruegel

Both moves were after 2018, April EU upgrade of its Mexico trade agreement.

On the 17th of July, the European Union sealed a trade agreement with Asian giant Japan. This deal ends or reduces tariffs on most products and it became guess largest ever trade agreement, concerning $152 billion products.

On the 25th of July, 2018, the European Union and America decided to hold back on all proposed tariffs, revisit the aluminum and steel tariffs and move towards achieving zero tariffs on all non-auto industrial products.

The European Union agreed to receive more American soybeans and liquefied natural gas. This would decrease its dependence on the Russian LNG as well as aid American farmers who lost out on the Chinese market as a result of the trade war.

However, the price of Russia’s LNG is a lot less than that of the United States, so it’s doubtful that much change would happen.

What were the Signs?

The United States is the largest importer of steel globally, and these tariffs badly hurt these companies that employ over 6.4 million workers, in the attempt to shield the 147,000 employees in the United States steel industry.

This particular trade war began to raise the cost for all steel users such as automakers. What’s more, the tariffs decreased the second-quarter profits for the top 3 automakers.

Now in order to satisfy shareholders, these costs were passed down onto consumers. This means that every product manufactured with steel began to see a rise in cost.

b.) Retaliations

The Prime Minister of Canada Justin Trudeau announced that Canada will retaliate with like tariffs.

Mexico as well announced that it will place traffics on United States industries situated in locations that were in support of Donald Trump.

These tariffs included pork products, flat steel, and lamps.

In another move, Trump said on the 10th of August 2018, that he was going to double tariff on steel and aluminum imports from Turkey.

This was done in the move to secure the release of American clergyman Andrew Brunson, who Turkey claimed was a part of the 2016 coup to oust the sitting government.

This move by the United States reduced the worth of the Turkish lira against the U.S dollar to an all-time low. This trigger fears that the fallen state of the Turkish economy was capable of initiating a fresh crisis in Europe.

WHAT WERE THE SIGNS OF RETALIATORY TARIFFS?

Some companies in the United States created the “Tariffs Hurt the Heartland” movement in order to make the government put a stop to the ongoing trade war.

Why were they concerned? Well, they were worried about the increase in costs of all imported goods. Furthermore, due to these retaliatory tariffs which were imposed on United States exports by Europe and China, it began to hurt farmers.

What’s more, in states like Wisconsin, Indiana and Illinois bankruptcies leaped to their worst level in a decade.

What was even more worrisome is the fact that those states in 2017 produced a huge amount of all food in the United States but this wasn’t the experience during the trade war.

WHAT DO YOU EXPERIENCE AS A CITIZEN OF A COUNTRY CURRENTLY IN A TRADE WAR?

In the examples we have seen above, the trade wars hiked the costs of consumer products that utilize aluminum and steel. Furthermore, half of all goods imported by the United States from China are used to create other products.

Hence, these tariffs raised their prices, and this forced them to either lay off workers or increase costs. Beer and soda suppliers were the initial producers to increase in cost.

Prices have also risen on imported heavy-equipment materials, computer chips, tool makers and clothing hangers.

The Automobile Manufacturers Alliance announced that American produced steel would cost more as soon as cheap imports from foreign nations are eliminated. They stated that “The move is raising automobile cost for consumers and a having a negative effect on the industry’s competitiveness globally”.

For instance, in Missouri, Mid-Continent Nail announced worker layoffs due to the hike in steel prices and this was rising too high for the company to stay profitable and afloat.

What’s more, Harley-Davidson reported that it had plans to move certain productions outside the country to steer clear of retaliatory European tariffs.

The lobster industry in Maine also suffered from the retaliatory tariffs on all American seafood. California cheese producers are also witnessing their markets in Mexico and China fade away, as a result of retaliatory tariffs.

The American bourbon industry and Wisconsin automobile parts producers are among the industries reaping the effects of the trade war as well. Tariffs have also decreased the United States grain and timber exports based on the reports of The Wall Street Journal.

A lot of American imports from China are from the United States. Various raw materials are moved to China to be processed, and then exported back to the United States.

For instance, salmon captured in Alaska is exported to China to be processed then exported back to American grocery stores.

Now if Trump places tariffs on all seafood imports, the result would be an increase in cost to 50 cents for a pound from the previous 25 cents a pound.

The foreign tariffs on all American exports will cause them to be expensive. Hence, United States exporters will have to lay-off workers in order to cut cost and stay competitively priced.

If this isn’t done, they’ll probably run out of business.

Over time, trade wars reduce economic growth; create a lot of layoffs, due to the retaliation of foreign nations.

So, the 12 million workers in the United States who have jobs related to exports could ultimately lose their jobs.

And this could reduce the economic growth of America by 0.4%.

Furthermore, in the long run, trade wars do damage to the domestic industry it was trying to protect in the first place.

This is because, without competition from foreign countries, home-based industries have no need for innovation.

And this would lead to a reduction in the quality of goods in comparison to goods produced by foreign nations.

CONCLUSION

As we have seen from this article, the signs that your country is currently in the midst of a trade war are numerous, such as an increase in imported goods, reduction in the quality of home-based products, and high amount of worker layoffs.

The outcomes of trade wars are undesirable for any economy in the long-run as it rarely creates the desired results due to the various retaliations of the countries involved.

Signs Your Country is in a Trade War

Share your thoughts and experience

E-mail is already registered on the site. Please use the Login form or enter another.

You entered an incorrect username or password

Sorry, you must be logged in to post a comment.