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Today, the seemingly stable growth of the global economy disguises serious risks. One of the primary threats to the current global economy are trade wars and the weaponization of trade where tariffs have become de facto ammunition for such conflicts. So, ask yourself: how do trade wars protect certain industries and hurt consumers?
A Trade War by Definition
A trade war presents a serious economic disagreement between states, which eventually leads to trade restrictions from one state and reciprocal counter measures from the othernation involved. This trading rivalry between two or more countries may have an ulterior purpose to conquer a foreign market or prevent a perceived negative impact of a national economy.
Political and legal measures taken at the national level serve as the instruments of a trade war. This is a set of economic and customs policies focused at maintaining their own favorable economic positions by introducing harsh trading limitations towards goods from another country or group of countries.
A nation’s economic state is considered beneficial if it is able to offer quality products at lower prices. However, the struggle for larger markets has never been conducted according to fair and strict rules. History has shown us that it is not the nation with the best products that usually wins, but the country that acts strategically and is more opportunistic.
Modern international trade features a severe contradiction between two opposite approaches, namely liberalization and protectionism. Liberalization became one of the main trends in international trade at the end of the 20th century.
It is evident in the growing openness of national economies, decrease of customs duties, cancellation of extra quotas, and the increase of fair competition practices. Most countries have also offered preferential investment regimes to foreign investors.
However, there is a protectionist tendency, (i.e. policy for protecting domestic producers by all means) and matenance of competitiveness of respective national goods and industries. The disruption of the balance between liberalization and protectionism ideologies, as well as defiance of other country’s interests has lead to an emergence of trade conflicts.
The Most Infamous Trade Wars
A historical example of how a trade war is fought is the trade conflict for the market of spices in the 16th century. It ended with a victory by the Netherlands. Another example was Italy’s fight with France for the export of silk cocoons from Persia in the late 19th and early 20th centuries.
Perhaps the most obvious example is the trade war between the US and Japan in the late 20th century. The Japanese strove to protect their market by introducing a large number of bureaucratic obstacles for imported foreign goods.
The most recent example of an economic conflict is between the modern nation states of China and the U.S, which began at the end of 2018, and is still without an armistice. This economic rivalry is mutual in the introduction of customs sanctions and quotas for protecting their respective national economies. The consequences of this trade war are being felt in many other countries who depend on their production and services.
Industries Hurt by Trade War
The adoption of the US Smoot-Hawley Act of 1930 increased customs tariffs and caused reciprocal responses from other countries. The result was an extreme drop in trade between the US and European countries, which finally pushed the US economy into the Great Depression.
The recent trade war between the US and China has already adversely affected the global economy. China’s GDP has slowed sharply, and signs of a slowdown have appeared in the US economy. The first industry that suffered the most from this trade conflict between China and the US was the automotive industry. China initially raised tariffs for imported cars into China from 15% to 40%. It hit US companies hard such as Tesla and Ford.
In reciprocity Huawei, a Chinese smartphone producer and telecommunications company,that now competes with Apple Inc also suffered. The U.S also placed restrictions on the export of semiconductors or processors vital to companies like Huawei. As a result of this trade war, Huawei has managed to ban sales of several iPhone models in China.
According to the Office of the US Trade Representative, agriculture is ranked third on the list of industries that have been negatively impacted by the trade war. Chinese authorities have also introduced additional tariffs on specific imported agricultural products from the US, which has left many American farmers in a complicated economic situation.
Trade War Impact on Consumers
Foreign trade is of vital importance to the development of national economies and the improvement of the populations welfare. At the same time, threats of internal instability that are associated with a country’s excessive economic dependence on the world market make it susceptible to other nations policies. This is the motive for each state conduct its own trade policy in accordance with its strongest industries.
Most countries have undertaken different measures, such as the introduction of additional customs tariffs and duties. Tax subsidies have historically been used to protect domestic industries and stimulate export. Such actions by governments to restrict or restrain international trade are done to protect local businesses and jobs from foreign competition.
Many economists of traditional theory have had negative opinions about trade wars. They believe that they often lead countries that are involved in economic conflict to a total decrease in overall economic well-being. Trade war impacts can be devastating for third parties as well. It can be observed in the examples of the Anglo-Irish trade war in the 30s of the 20th century and a banana war when Europe imposed sanctions against US citrus fruits in 1993.
At the same time, trade wars have been justified by supporters of other radical economic concepts, such as institutional and Keynesian theories. They claim that adequate measures taken by governments in a given situation can support national producers and help avoid unemployment among the population. These concepts were taken into account for planning actions in the current trade war between the US and China. Who will win this trade war? That will be left to the consumer that still has to pay for their product or service and to what end.