What is the Trade Wars?
Trade War is a situation when one country raises its tariff on imports and in response, the other country also raises its own tariff to restrict their imports. This results in an imbalance between imports and exports and is usually done to promote domestic production, increase employment in the nation, reduce balance of payment and also to create unfavorable condition to the enemy country.
Purpose of Trade Wars
#1 – To Protect the Domestic Economy
The reason behind increasing the tariff might be to protect the domestic manufacturers as they might be unable to compete with foreign companies.
#2 – To Create Jobs in Domestic Country
The importing country might want to create employment in the nation so as to reduce unemployment and increase the economy of the domestic country.
#3 – To Reduce the Balance of Payment Differences
Sometimes to protect the country tariffs increased or import restricted. This might happen when exports of the domestic country are less as compared to imports and because of this, the currency of domestic country devalues.
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#4 – To Create Unfavourable Conditions in Importing Country
The exporting country may raise tariffs on imports to a specific country to create unfavorable conditions in another country. This is a planned trade war so as to make the country economically weak. This happens only when the domestic country largely depends upon the imports.
Example of Trade War
- US President Mr. Donald Trump increased tariff on imports of some goods like televisions, washing machines, aircraft parts, etc. from China so that the people buy American i.e. domestic goods.
- The aim of Mr. Trump is create jobs in the US, reduce the trade deficit, and make the country self-sufficient and less reliable on others. China in response to this increased the tariffs on exports to the US on automobiles, soybean, and lobsters.
- Due to a reduction in exports of the automobile and US agricultural exports, many in the US lost jobs as US is the largest exporter of these goods.
- Finally, both entered into a unilateral deal. President Trump met with the President of China Xi Jinping at G-20 Conference and decided to enter into the settlement as higher tariffs caused losses to both the country’s economy. They decided to reduce the tariffs on some of the products and signed the deal for the protection of US intellectual property, internet security, etc.
Causes of Trade Wars
- To Reduce Trade Deficit: When an importing country wants to reduce the trade deficit so as to maintain stability in the economy, it increases or puts restrictions on imports from another country so as to encourage domestic manufacturing and reduce imports.
- Threat from Exporting Country: When importing countries have a threat from exporting countries like stealing intellectual property rights, trade, and other secrets, etc. then the importing country may restrict the imports so as to protect their nation.
- To Degrade Exporting Country: This is the evil cause as sometimes importing country wants to degrade the exporting country might be because of the country being the largest exporter hence importing country wants that exporting countries demand and currency to devalue hence they put restrictions on imports.
- Other Causes:
- To make the domestic country self-sufficient.
- To increase economic growth.
- To encourage domestic production.
Effects of Trade War on Global Economy
The trade war between the two nations can also affect the other nations and the global economy at large as all nations are connected to each other in terms of trade. This affects the global economy and may result in a recession in the global market. The effects are explained below:
- Raise the Price Globally: As the trade wars increase the tariffs by restricting imports results in increasing the cost as compared to imports and if those imports are used for export to another country the price can rise globally.
- Increase in Inflation Globally: Increased prices result into increase in inflation at the global level and this may cause the recession of decrease in share prices of many country’s and affects the global market.
- The Threat to Global Economy: It is an indirect war between two countries the supporting nations of the two countries can also increase the tariff or restrict the imports from affected countries which affects the global economy.
- Slows the Economic Growth: This type of war between two countries slows down the economic growth of affected countries also which affects the growth of affected nations.
- Protects the domestic companies and step towards economic growth.
- It creates jobs and increases the standard of living.
- Results into trade deficit and revaluation of home currency.
- Promotes domestic manufacturing.
- Protect the trade policies and secrets from other nations.
- It is an initiative against unfair trading policies and gets support from all affected countries.
- Trade wars might result in an increase in the cost of goods as compared to imported goods.
- They can make the domestic companies sick as fear of global competition reduces.
- It may result in loss of jobs and affects the economy at large this might be because of largely dependent on imports.
- It affects the global economy.
- It results in inflation.
The trade war is initiated by restricting the trade or increasing the tariff on imports from another country the reason may be logical or evil. This war starts when in response to restriction or change in tariff the other country also restricts or increases the tariff or takes any other action which indirectly affects the importing country.
Trade wars affect the global economy at large as the connected countries also affect by this war. They can result in a global recession. This can be controlled when both the companies decide to enter into a unilateral deal or decide to negotiate or when they decide to involve the World Trade Organization for settlement and to restrict unfair trade practices.
This has been a guide to what is Trade Wars. Here we discuss the causes and effects of Trade Wars along with their purpose and example. You can learn more about economics from the following articles –