What Is a Trade War and How Does It Affect You?

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What Is a Trade War and How Does It Affect You?

Definition of Trade War:

A trade war is an economic conflict between two or more countries where countries impose trade tariffs on each other with a view to damaging the trade of each other.

The countries or nations involved in trade war want to improve their own imports or exports, more specifically, they want to protect their own trade. Trade wars may occur when another country's trading practices are deemed to be unfair to one country or when the government is pressurized to make imported items less attractive to consumers by the domestic traders or business unions. A country can either impose tariffs on the imports or increase subsidies on domestic industries to protect its own trade. Poor countries mostly become losers in trade wars because most of them are not able to increase subsidies.

An Explanation from the Present to Historical Context:

President Donald Trump recently has ordered very high new tariffs on imported steel and aluminum in America which can be cited as an example of beginning a trade war. Under the Smoot-Hawley Tariff Act of 1930 United States imposed steep tariffs on about 20,000 imported items which represent the most mentionable trade war of the 20th century. Canada retaliated with high tariffs on United States exports which increased quickly to 61 percent from 1929 to 1933. The United States canceled the tariffs in 1934. The trade war caused by the Smoot-Hawley Tariff act aggravated the economic disaster of the Great Depression. This is like a universal agreement that none was the winner in that trade war.

According to Joshua Meltzer, a senior fellow at the Brookings Institution and a Professor of International trade law at Johns Hopkins University, Smoot-Hawley “was such a disaster that it’s held sway over American trade policy for over 80 years.” Marc William Palen, who is a professor of history at the University of Exeter in Britain and the author of The ‘Conspiracy’ of Free Trade, said to the question of who wins a trade war, “the easy answer is to say that no one wins a trade war.”

Professor Palen explained the aforementioned trade wars between Canada and the United States, which resulted in a drastic drop in Canadian exports to America and caused Canada to find export markets in Britain. “The British Empire was the winner,” he said. According to Professor Palen, another big winner was Soviet Russia which was not involved in this war. Professor Palen told that the Smoot-Hawley tariffs led Italy to desert American imports and to trade with Soviet Russia, a trade relationship which exists till today.

According to John Conybeare, who is an emeritus professor of political science at the University of Iowa, and the author of the book named Trade Wars, France was the winner because it retaliated with higher tariffs against Italian exports to France as Italy imposed high tariffs on French imports. As a result, Italian exports to France saw a serious downfall. France continued the higher tariffs even after canceling the tariff by Italy. According to Professor Conybeare, the rich countries probably prevail in the trade war with poor countries but the case is different while the trade war is between equal sized or countries of equal economic strength. In these cases, both countries lose.

Conybeare explained the “chicken wars” of the 1960s, a trade war occurring as a result of Germany and France imposing tariffs on American chickens and the United States as a reply imposed tariffs on a variety of goods such as Volkswagen buses, light trucks, French brandy, etc. The United States even terrorized to decrease its armed forces’ presence in Europe. In spite of all these threats, the United States was unable to win against Germany and France. American and European consumers became the biggest losers as they had to pay higher prices for the available goods.

American automakers like Chrysler and General Motors, protected from foreign competition by the tariffs, could not reduce costs or modernize or improve quality and as a result, ended in bankruptcy. Quite same is the case of American steel industry, the sector has been receiving more protection from tariffs and quotas than the other industry since 2nd World War. The protection has been used to raise prices, increase profits and pay the executives high rather than using for automating, modernizing or reducing costs. In spite of the protection for decades the US steel industry is facing continuous decline. According to the Bureau of Labor Statistics, domestic steel employment dropped to 83,600 in 2016 from 135,000 in 2000.

From the above present to the historical discussion, you can easily understand that trade wars whether caused by imposing higher tariffs or subsidizing the local industry cannot work for the welfare of the economy. Here the biggest losers are the consumers and the poor. Few industries can benefit but losers will be greater than the winners. The countries or nations should understand the benefits of free trade and avoid trade wars for the greater welfare of the economy and human being.

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