Trade wars are not fought with guns, missiles, planes, or ships. Instead they are fought with the raw power of economics, and in particular a special type of tax called tariffs. These are taxes which a country imposes on imported goods. Whilst paid for by the producer, they are usually passed onto consumers in the form of higher prices. This makes the good less competitive with domestic alternatives. In this way, governments can help domestic producers by increasing the demand for their goods. But why is it a war? It becomes a war when other countries respond with tariffs of their own, often then leading to a series of tit-for-tat retaliations, which can often spiral totally out of control.
As you read this, one of the fiercest trade wars of all time is being fought between the US and China. It all started in early 2018 when President Trump placed a 25% tariff on over 800 products imported from China worth $34 billion. Within months the trade war escalated dramatically with US tariffs on over $200 billion worth of Chinese imports and China placing their own tariffs on billions of dollars of US imports.
Given the widespread benefits of international trade, you may (and should!) be asking the question of why this trade war was started in the first place. The answer is complex, but what we do know is that the US economy had a huge trade deficit ($419 billion) with China and President Trump was intent on reducing it in order to protect and help American producers. With less imports from China, it is expected that American consumers will instead buy goods produced in the US, boosting the US economy and leading to a series of positive knock-on effects including job creation and improved living standards.
Whilst this sounds great, it is usually not the reality. Just like in conventional wars, there is often no ‘real winner’, and many ordinary people will suffer along the way. Take the American Soybean farmers as an example. China loves Soybeans, and is by far the largest importer of America’s top agricultural export. Rather than boosting this industry in the US, the trade war has had devastating effects, with demand for Soybeans falling significantly and farmers being forced to pay the tariffs themselves. The American consumer is also feeling the pinch by having to pay higher prices on many goods which are imported from China with no domestic alternative. This included thousands of toys around Christmas time which probably resulted in far fewer gifts under American Christmas trees!
There is however some good news, and that is the announcement that phase 1 of a new trade deal is to be put into effect on the 15thJanuary. We don’t know much about what this will look like, but one thing is for sure: it can’t get any worse for anyone!
Think like an economist!
