Trade War

Definition

A trade war is an economic conflict that arises between two or more countries when they impose tariffs or other trade barriers on each other’s goods and services. The aim is typically to protect domestic industries and create a competitive advantage. This act can lead to retaliation and can potentially harm both the global and domestic economies.

Phonetic

The phonetic pronunciation of “Trade War” is: treɪd wɔːr

Key Takeaways

1. Economic Impact: Trade wars can significantly impact not only the economies of the participating countries but also the global economy. This can lead to increased prices for goods and services, reduced economic growth, and potential loss of jobs.
2. Political Consequences: Trade wars often have significant political implications. They can strain diplomatic relations between countries, impact international alliances, and influence domestic politics. As such, they can lead to increased political tension and instability.
3. Consumer Consequences: Consumers are often the ones who bear the brunt of trade wars. Tariffs can lead to increased prices for everyday goods, and prolonged trade wars can decrease consumer purchasing power and lower living standards.

Importance

The term “Trade War” is significant in business and finance as it can deeply influence the global economy, industries, and international relations. A trade war occurs when countries impose tariffs or quotas on imports and restrict exports, attempting to safeguard their local businesses from foreign competition. However, these actions often result in escalating retaliatory measures among the involved countries, driving up the prices of goods and services for consumers, disrupting supply chains, and potentially dampening economic growth. Moreover, prolonged trade wars can lead to a decline in global trade, adversely impacting various sectors, investor sentiment, and the international geopolitical landscape. Hence, understanding “trade war” is crucial in the realm of business and finance.

Explanation

A Trade War is a strategic tool used in economic policy where countries try to damage each other’s trade, usually by imposing tariffs or quota restrictions. The primary purpose of a trade war is to protect domestic industries and create a competitive advantage for these native companies. By imposing tariffs, countries aim to make imported goods more expensive, hence encouraging domestic consumers to buy local products. It is an economic policy that becomes a tit-for-tat dispute between nations. Measures are introduced to harm the other’s economy, and are typically retaliated with similar strategies, thus leading to an ongoing trade battle or ‘war’. Trade wars are used as a form of political leverage and can be initiated for a variety of reasons, be it economic dominance, protection of jobs, or a response to unfair trade practices. By increasing the costs of imported items through tariffs, governments hope to encourage domestic production and thus stimulate job growth and economic stability within their own borders. Whilst the aim may be to protect domestic interests, the consequences of a trade war can have global implications, potentially causing price increases for consumers, harming international relations, and disrupting global supply chains.

Examples

1. The U.S.-China Trade War (2018-2020): This is probably the most recent and significant example of a trade war. It began when the U.S. government, under President Donald Trump, started placing tariffs on billions of dollars’ worth of Chinese goods in 2018 to address issues such as intellectual property theft. China retaliated with tariffs on U.S. goods, and both countries escalated the dispute for nearly two years with tariffs on hundreds of billions of dollars’ worth of goods. This trade war severely affected global supply chains and markets.2. The Chicken War (1961-1964): This is an older example of a trade war and began when the European Economic Community (now the European Union) placed tariffs on U.S. chicken imports in response to growing imports of cheaper U.S. chicken. In retaliation, then-President Lyndon B. Johnson imposed a 25% tariff (which still partly exists today) on several products, including light trucks, brandy, and potato starch.3. The U.S.-Japan Trade War (1980s): This trade war was sparked by growing U.S. trade deficits with Japan. The U.S. accused Japan of unfair trade practices, and in response, placed tariffs and quotas on Japanese products such as automobiles and semi-conductors. Eventually, Japan agreed to “voluntary export restraints” and signed agreements opening its markets to more foreign goods. However, the tensions led to a downturn in U.S.-Japan relations for several years.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Tariffs
• Import Quotas
• Protectionism
• International Trade
• Retaliatory Measures

Sources for More Information

• Investopedia
• CNBC
• Bloomberg
• Reuters