What Is a Trade War? | Do Trade Wars Work?

(Last Updated On: August 10, 2018)

What Is a Trade War? | Do Trade Wars Work?
Trade wars have been mentioned in the news a lot lately. Much of the trade war discussion stems from United States President Donald Trump, who in March of 2018 tweeted:

“When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!”

While the President clearly sees trade wars as a potentially good thing, many have been left wondering what trade wars entail in the first place. What is a trade war, anyway?

What Is a Trade War?

A trade war begins when one nation imposes tariffs or quotas on imports, and foreign countries retaliate with similar trade barriers. These sort of tit-for-tat responses can escalate quickly, and the result can be a reduction in international trade, and often, increased global tension.

Trade wars typically start as an attempt for a nation to protect their domestic industries and to create jobs by decreasing the amount of outside resources. This rationale is largely behind President Trump’s decision to implement a wave of new tariffs.

The Current United States Trade War

In March, 2018, President Trump followed up his trade war tweet by announcing a 25% tariff on steel imports, paired with a 10% tariff on aluminum. This angered many in the international community. Frequent trade partners like Canada and Mexico have either retaliated with similar tariffs, or have announced a plan to retaliate. Interestingly, this so-called trade war was actually the second one the U.S. has entered this year.

In January, 2018, President Trump angered China when he imposed tariffs on their solar panels and washing machines. When brought to the attention of the World Trade Organization, it was ruled that there was no evident case for these tariffs. Fast-forward back to March, and the U.S. began to negotiate with Chinese officials under the radar. When China refused to meet demands, the Trump administration announced a 25% tariff on $50 billion in frequent Chinese exports, including electronics, aerospace technology, and machinery. China retaliated by announcing a 25% tariff on $50 billion of U.S. exports to China. Both the U.S. and China have been at (trade) war ever since, attempting to negotiate, but ultimately retaliating to each attack with new attacks.

Do Trade Wars Work?

Whether or not trade wars work depends a lot on who you ask. Unfortunately, as with so much in the United States these days, opinions tend to split down party lines.

There is no question that American steel and aluminum industries will benefit from this current trade war. A greater demand for these materials will lead to more jobs and bigger profits.

At the same time, other sectors could be hurt by the higher steel and aluminum prices. For example, the tariffs could raise the cost of raw materials for car and aeroplane makers, which could result in more expensive cars and higher airfare costs.

You also have to factor in how retaliations from other countries might impact prices. China is the world’s second-largest economy, and they have already begun to tax U.S. agricultural and industrial products. This could mean U.S. companies have to raise prices to compensate.

Overall, a global trade war could hurt consumers around the world. With so many taxes and regulations, it will be harder for companies to operate, and thus, the customer is left to make up for the losses.

What Is Next?

Only time will tell how this trade war all plays out. History has taught us that tariffs often lead to higher costs for consumers. And many economists, and even some Republicans, are now beginning to voice opposition to President Trump’s trade policies. The consensus for many seems to be that a global showdown between the world’s biggest economies isn’t necessarily a good thing.