Countries that aim to damage each other’s trade by raising tariffs and trade barriers against one other, are described as being in a trade war.
Beggar-thy-neighbour policies, such as retaliatory tariffs and punitive quotas, are typical of trade wars. So are competitive currency devaluations, and subsidised exports aimed at undercutting the rival country in other markets. Acrimonious breakdowns in trade negotiations, and complaints to the World Trade Organisation (WTO), are all part of the political theatre of trade wars. Outright bans on financial transactions, investments and the movement of goods and services across borders, sometimes known as sanctions, can also be imposed in extreme circumstances.
Causes of trade wars
Trade wars usually arise when one nation decides that the benefits of cheaper imports are outweighed by the economic and political costs. Industries with a powerful political lobby can stir up the conditions for a trade war, in the hope of preventing cheap imports from gaining market share. Sometimes the importing country has sectors that it wants to protect from foreign competition for strategic or national security reasons, such as key technology businesses.
The perception that trade partners are gaining a disproportionate advantage from freer trade, at the expense of the importing country, is a symptom of impending trade war. Sometimes trade wars escalate slowly, when negotiations are accompanied by incremental rises in tariffs to increase political pressure.
Dumping
In general, the chances of a trade war are heightened by the existence of longstanding trade imbalances. For example, some countries choose to subsidise goods for export at below production cost, which is known as dumping. Over time, the countries that buy these goods tend to experience de-industrialisation. This is because their domestic manufacturers cannot compete on price, or security of supply, with the dumped imports. De-industrialisation creates political tensions that usually move in favour of raising tariffs and trade barriers.
Consequences of trade wars
In most circumstances, trade wars suppress trade flows and global GDP growth; in other words, they are bad for wealth creation overall. Because importers tend to pass on the higher cost of tariffs (which is a tax on imports) to consumers, trade wars can also be inflationary, causing higher prices. Trade wars usually have wider political repercussions, affecting freedom of movement, for example, and technology sharing.
Winners and losers
While trade wars tend to be negative for consumers and global commerce, they can nevertheless be beneficial for individual nations or protected sectors, especially if wider political objectives are taken into consideration. ‘Winning’ a trade war – or extracting concessions by threatening a trade war – largely depends on the relative importance of international trade to each nation’s economy, and to the interests of those in power. The more that a trade war hurts you domestically, the greater the chances are that you are going to make concessions to the other side. For this reason, retaliatory tariffs are often targeted at industries that lie within the constituency of individual politicians who may be decisive in negotiations. However, some politicians do prefer to foment full-blown diplomatic crises, rather than admit defeat at the negotiating table.
Law of the jungle
Historically, the WTO has been largely ineffective as an enforcer of international norms and rules. China, the U.S. and the EU generally deal with trade issues on a bilateral basis, applying the ‘law of the jungle’, which is to say that they negotiate on the basis of raw power, and who has greater leverage, rather than submitting to arbitration or a legal judgement, for example.
Trade war risk management
Until recently, the post-war consensus has been that trade wars are worth avoiding, for both diplomatic and economic reasons. But as the risk of trade war grows, international traders of soft commodities and secondary raw materials are having to embrace next-generation CTRM software that helps them navigate these uncertainties and protect their margins.
