The Good Book warns that those living in the end times should expect to hear of ‘wars and rumours of wars’ and that ‘nation will rise against nation, kingdom against kingdom.’ It seems there are many kinds of war – cold war, guerrilla war, cyber war, even a kind termed holy war. One type of war that has been recurring in the news, on the international business scene, over the past weeks is the trade war(popularly referred to as the “Trump Trade War”).
In a span of two weeks, the President of the United States of America, Donald Trump, ordered up an array of tariffs against numerous countries, particularly China.
Economists are worried that the world is on the verge of an all-out trade war between the two largest world economies, featuring ‘do-me-I-do-you’ reprisals.
This face-off is bound to feature heated rhetoric and appeals to the World Trade Organization, which may be ill-equipped to respond.
What is a Tariff?
A tariff is a tax placed on imported goods. Tariffs have the effect of reducing purchase of imported goods as they become more expensive. The intention is to induce people to buy local products instead. It is to the end that the local economy is boosted.
What is a Trade War?
In simple terms, a trade war is a situation whereby countries try to damage each other’s trade, typically by the imposition of tariffs or quota restrictions. When one country raises tariffs on imported goods, the other responds in a retaliatory, an-eye-for-an-eye move.
Trump’s tariffs and the threatened retaliation from other countries meet this definition.
Trump’s Tariffs and the Response
President Donald Trump ordered tariffs on $60 billion worth of Chinese goods.
First, they came in form of solar panels.
And then Steel and Aluminum.
In a tit-for-tat-response, China has hit $3 billion of U.S. wine, fruit, steel pipe and other exports with tariffs. The EU, on the other end of the line, warned that it will respond with its own 25 percent tariffs on $3.5 billion of American goods.
Other affected countries are yet to make countermeasures for the steel and aluminium tariffs, which took effect March 23, 2018.
Trump’s tariffs may be described as some sort of protectionism for the purpose of boosting the country’s economy and defending it from foreign competition.
The effect of this is that the price of steel and aluminum will go up in the US because there will be less of these goods coming in from abroad.
The greater demand for local steel will push up its price, thereby increasing profits for American steel makers. Thus, in theory, the imposition of tariffs might actually work.
However, the tariffs might also mean that manufacturers that make use of these raw materials might have to increase prices for their finished products. That would in turn hurt consumers.
Is free Trade Better?
Free trade is the opposite of protectionism. This implies few tariffs are imposed on imported products, giving people freedom to buy cheaper or better-made products from anywhere in the world.
Free trade has brought products such as cars, iPhones, foods, etc to our homes from everywhere in the world.
Adam Smith, often described as the father of free trade economics, said: ‘It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him to make than to buy.’
Just as it makes sense for a family to ‘trade’ with others for its wellbeing, it makes similar sense for countries to do same. Thus, proponents argue that freer international trade makes more economic sense.
However, that also means that consumers are less likely to buy domestic goods. Thus, while free trade makes some people richer, it makes other people poorer.
Are tariffs the only weapon in trade wars?
One of the simplest ways countries restrict imports from other countries is to place tariffs—a kind of tax—on imports from other nations.
Tariffs make the imports more expensive and reduce the demand for the foreign products. This makes the products produced within the country more competitive and profitable—and, regrettably, more expensive for consumers.
Another weapon is regulation. A country can add regulatory requirements to imports that raise their prices or prevent their import altogether.
Sometimes a country may engage in currency manipulation to make its exports more attractive and imports less attractive.
President Donald Trump has accused China of debasing the value of the Chinese Yuan to make its exports more competitive to foreign markets, particularly that of the U.S. China, of course denied this.
This is worrisome talk between great nations which in its own way is just one more “rumour of war” in our own headlines.
Another common weapon in trade wars is the use of import quotas, in which a country puts a quota on the amount of certain products that can be imported from another country.
Government subsidies also, can be a weapon in trade relations, because subsidized industries in one country can dump their products at below cost in another country, thereby creating an unfair trade advantage.
The availability of all these weapons therefore begs the question how trade wars can end. Indeed, if there’s one thing economists agree on, no one wins a trade war.
Zachaeus Olamide Akanni