What is a Trade War?

A trade war happens when one country retaliates against another by raising import tariffs or placing other restrictions on the other country’s imports.

Trade wars can commence if one country perceives that a competitor nation has unfair trading practices. Domestic trade unions or industry lobbyists can pressure politicians to make imported goods less attractive to consumers, pushing international policy toward a trade war. Also, trade wars are often a result of a misunderstanding of the widespread benefits of free trade.

Trade wars are usually considered a side effect of protectionism. Protectionism refers to government actions and policies that restrict international trade. A country will generally undertake protectionist actions to shield domestic businesses and jobs from foreign competition. Protectionism is also a method used to balance trade deficits. A trade deficit occurs when a country’s imports exceed the amounts of its exports. A tariff is a tax or duty imposed on the goods imported into a nation. In a global economy, a trade war can become very damaging to the consumers and businesses of both nations, and the contagion can grow to affect many aspects of both economies.

A trade war that begins in one sector can grow to affect other sectors. Likewise, a trade war that begins between two countries can affect other countries not initially involved in the trade war. As noted above, this import “tit-for-tat” battle can result from a protectionist penchant.

A trade war is distinct from other actions taken to control imports and exports, such as sanctions. Instead, the trade war has detrimental effects on the trading relationship between two countries because its goals are related specifically to trade. Sanctions, for example, may also have philanthropic goals.

In addition to tariffs, protectionist policies can be implemented by placing a cap on import quotas, setting clear product standards, or implementing government subsidies for processes to deter outsourcing.

Trade wars are not an invention of modern society. Such battles have been going on for as long as nations have conducted trade with one another. For example, colonial powers fought with each other over the right to trade exclusively with overseas colonies in the 17th century.

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