The term 'Trade War' is included in the Economics edition of the Financial Dictionary. Get your copy on Amazon in Kindle, Paperback or Audio edition. Check for lowest price here...
A trade war is a potential worst case result of protectionism. This serious sounding series of events unfolds when the first country erects tariffs on the second country as a response to the second country placing their own tariffs on the first country’s imports.
Such trade wars can erupt if one nation believes the other nation’s trading policies to be unreasonable or unfair. It can also occur as trade unions within a country place intense pressure on the national politicians to discourage consumers from purchasing imported goods from other nations. Trade wars can also happen because the various groups of citizens, unions, and politicians in both countries do not properly understand the many proven and demonstrated advantages of free trade.
It is relatively simple for a trade war that starts out in only a single sector to expand into other sectors as well. It is also all too easy for such trade wars that start out between one nation and another to explode into one with other countries that did not start out as a part of the economic conflict.
Distinguishing the differences between trade wars and other economic actions which cause a negative impact on the trading relations between two states has to do with the goals. These economic conflicts are focused on free trade. Sanctions are another form of economic embargo that also have political, military, or humanitarian focused goals.
Trade wars should not be confused with tariff wars. In a tariff war, two nations duel economically because the first country increases its taxation rates on the exports of the second country. The second country then chooses to retaliate by boosting their own tax rates on the first country’s exports. The higher tax rates are intended to harm the other nation financially and economically. This generally does happen as such tariffs lessen the chances of consumers purchasing products from external sources when they increase the aggregate final cost on those goods or services.
There are various reasons why nations might decide to begin a tariff war. They might not like their trading counterpart’s political choices. A country could feel that through exerting sufficient economic pressures on their trade partner, they can create a sea-change in the behavior of that government. Such a tariff war as this is often called a customs war.
There are a variety of economists who concur on the idea that some economic protectionist policies entail greater costs than do others. This is because certain actions have a higher likelihood of instigating a full blown trade war. Looking at a prescient example is helpful to understand the argument. If the United States raised its tariffs on China, then China would likely respond by increasing its own tariffs on the U.S. and American imports. Yet if China instead increased its subsidies to steel makers, then it would be difficult for the U.S. to proportionally respond against these economic actions. Political constraints would likely limit the U.S. politicians in their abilities to respond in kind. This is why such subsidies can be hard to effectively counteract, even for wealthy developed nations.
Poor nations tend to be more susceptible to trade wars than do rich ones. They often lack the financial capability of offering meaningful subsidies to their own domestic producers. They also struggle to erect effective economic protections in the face of foreign trade partners dumping less expensive goods on their own domestic markets. By placing such tariffs on these foreign goods, they run the risk of increasing the prices of necessary products to levels which their own impoverished citizens simply can not afford at all.