What Is a Trade War ?

Trade war is a situation in which countries try to hurt each other’s trade by imposing tariffs or quota restrictions on goods they import and export with each other. These types of conflicts arise because the nations involved are trying to improve imports or exports of their own country. Trade war has a potential of increasing the price of certain imports if the nations involved refuse to make the compromise. Trade war can also happen between states.

Trade war arises because of the protectionism of government’s policies that restrict free trade between countries wanting to protect the benefit of local competitors from foreign competitors. The common instruments for protectionism are tariffs, quota restrictions and subsidies to local competitors. This instrument can also be used to overcome a trade deficit.

Another way in which tariffs are used is to inflict financial damage to the other country, twisting the arm of the other countries if they think that they are not working as per their demands. The domestic competitors have an advantage if the tariffs are increased on imported goods.

Advantages of trade war:

  1. It benefits domestic competitors form unfair foreign competitors.
  2. It improves a trade deficit.
  3. Helps increase demand for domestic goods and creates jobs in the economy.
  4. Checks countries with unethical trade practices.

Disadvantages of trade war:

  1. Discourages trades between two or more nations involved.
  2. It increases the cost of goods and induces inflation.
  3. Slows economic growth and hurts diplomatic relationships with other countries.
  4. Reduction in demand for imported goods thus reducing the shortage of choices for the consumer.

Although there are many other things that get disturbed by a trade war, the worst is that it is affecting the lower income citizens. As a government often puts higher protection on goods which are consumed by poor people, it is found that the government puts higher tariffs on lower end clothing, shoes, sugar etc.

The trade war between the US and China has been bubbling up from 2018 and now still continues with aggression. Tariff implementation on each other continues to shock the market. If nations do not compromise with each other on good terms eventually other countries are also going to suffer.

Ashutosh Gedamkar
Ashutosh Gedamkar
Account Manager India
agedamkar@tvmarkets.com