What is the definition of a trade war?

A trade war is an economic policy that is instituted when one country responds to a trade imbalance by raising import tariffs on the goods and services from one or more countries. A tariff is essentially a two-way tax. If country A imposes a tariff on sugar from country B, then country B will have to pay country A more money to import its sugar. However, country B will attempt to offset the effect of this tariff by raising the price of sugar making it more expensive for the companies in country A to use country B’s sugar to make its products.

In addition to tariffs, countries can take other measures to place restrictions on imports from foreign companies. Contrary to the conventional notion of a war with at least two opposing sides, a trade war can be unilateral. An example of this is an ongoing trade war between the United States and Japan. The United States placed a tariff on some items, including some vehicles, many years ago. However, to date, Japan has refused to retaliate.

At their core, trade wars are born out of a protectionist government policy, which can be defined as a government taking actions and making policies that restrict free and fair international trade. The two most common reasons for a country to take protectionist policies are

• To protect domestic businesses and jobs from foreign competition
• To balance a trade deficit (i.e. when one country’s imports exceed the amount of its exports)

Proponents of tariffs will say that, by making foreign goods more expensive, tariffs can increase global demand for a country’s goods and services. This can fuel job growth within the affected industries. On a macroeconomic level, a trade war can help to correct a trade imbalance. In some cases, if other measures, such as import quotas have not helped correct a trade deficit, a trade war may be an outcome of last resort to punish nations with unethical trade policies.

The primary criticism of a trade war is the law of unintended consequences. Namely, a trade war frequently hurts the consumers and industries they are intended to help. One of the reasons for this is that it can create fewer choices for consumers, which drives up the cost of the goods that are subject to tariffs. For example, when President Trump announced his tariffs on Chinese goods in early 2017, domestic companies – such as Whirlpool Corporation – that rely on less expensive imported steel reported a pessimistic outlook for future earnings based on the projection for higher material costs. Those costs would inevitably be passed along to the consumer who would then be expected to pay more for their home appliances. This could have the effect of discouraging consumer spending which can have the effect of slowing, not expanding, economic growth. In a global economy, economists argue that this example shows how a trade war can skew economic indicators and perhaps make an economy look more robust than it actually is. For example, many U.S. companies that use foreign steel and aluminum modified their supply chains to lock in the prices before the tariffs kicked in, producing a false indication of economic strength. Finally, some critics argue that by issuing tariffs, diplomatic relations between the countries can be damaged which can prevent the cultural exchange between countries.

The primary risk a trade war presents to the global economy is in the collateral damage that can be delivered to other nations. In a global economy, anything that hurts the economy of one country can have a domino effect that sends economic ripples throughout the global economy.

An example of every facet of a trade was is evident in the ongoing (as of this writing) U.S.-China Trade War that started in 2018. In January 2018, President Donald Trump carried through on his pledge to impose tariffs on a range of products including steel, aluminum, and solar panels. This was an extension of what he had pledged during his campaign for President of the United States. At that time, then-candidate Trump had connected with American workers by making a point of critiquing what he saw as unfair trade deals that not included the Trans-Pacific Partnership (TPP) and the North American Free Trade Agreement (NAFTA). Trump even threatened to pull the United States out of the World Trade Organization (WTO). But a particular focus of Trump’s policy was the nation’s growing trade deficit with China.

The tariffs of early 2018 targeted Chinese products in particular. In addition to placing tariffs on $500 billion of Chinese goods including steel and soy products, President Trump threatened large fines over intellectual property rights. As expected, the People’s Republic of China announced their intention to impose a 25% tariff on over 100 U.S. products. For the rest of the year, the trade war became a catalyst for volatility in the stock market as both the United States and China continued to place tariffs on new products. When the initial tariffs kicked in during September 2018, it seemed they had achieved their desired effect for the Trump administration. The Chinese economy was experiencing a slowdown, in part, due to the tariffs and by December the Chinese and American governments agreed to not impose any new tariffs and began negotiations aimed towards a long-term trade deal.

However, just when a deal looked to be imminent, the U.S. announced that we were pulling out of trade negotiations due to China taking a new, hard-line stance that, in part, demanded that the United States lift the current tariffs in advance of a new agreement. This immediately led to a decline in the U.S. markets. As of this writing, it's not clear if there when the trade war will be resolved. It is, however, a good case study in both the advantages and consequences of a trade war. On the one hand, the United States trade deficit with China (a key motivation for the tariffs to begin with) is at its lowest level since 2014. On the other hand, U.S. consumers are paying more for some items and the overall stock market remains very volatile largely as a result of the uncertainty surrounding two of the world’s largest economies.

Although the United States current trade war with China is dominating the headlines and has tremendous significance due to the size of both country’s economies, it is far from the only trade war to have an impact on the economy of the United States as well as the global economy.

Of course, students of American history can relate to the fact that our nation’s war for independence was waged largely due to England’s imposition of tariffs (or taxes) on the colonies without the colonies having representation in England. One of the signature moments of this trade war was the Boston Tea Party.

Another trade war that impacted the United States for a couple of years was our Pasta War with some European states that lasted from 1985 until 1987. The United States imposed tariffs on European pasta due to the discrimination against U.S. citrus products in Europe. This was an echo of the larger Chicken Wars of the early 1960s when France and West Germany placed tariffs on imported U.S. chickens which prompted the Kennedy administration to respond with a 25% tax on a variety of European products including brandy and light trucks. These tariffs remain in place today.

However, one of the most notorious tariffs in twentieth-century America was the Smoot-Hawley tariffs of 1930. In an effort to lift the United States out of the emerging Great Depression, the United States passed the Smoot-Hawley act which raised tariffs by 50% on imported goods. Even though the law and the associated tariffs were eradicated by the passing of the Reciprocal Trade Act of 1934, it had accelerated the Great Depression and the nationalistic fervor which was a key reason behind both World War I and World War II.