What Is Trade War?
In general terms, trade war is an economic dispute between two or more countries, characterized by the imposition of commercial and customs duties or quotas.
In this type of dispute, one or more nations aim to obtain economic advantages and/or harm the others.
According to the analysis of economists, caution is needed when classifying some episodes as a trade war.
This is because, in a globalized world characterized by multilateral (internationalized) trade, it is common for States to “exchange barbs” at times, increasing tariffs for products from competing nations.
However, when there are successive battles and deterioration in trade relations , there is likely to be, in fact, a greater conflict.
This is the case of the current dispute between the two largest world economies: the United States and China.
Partners in import and export , both started tariff disputes in 2018 that, at first, did not signal a major conflict.
However, after more than a year of provocations and protectionist measures, it became clear that this was a trade war, with the potential to impact a number of nations that did not even participate in the dispute.
We will further explain these effects in the next topics.
How Does The Trade War Affect The World?
“We know from history that no one wins in a trade war. The tariff increases by major countries represent a reversal of efforts since the end of World War II to eliminate trade barriers and facilitate global trade.”
The above comment, taken from an article by the secretary-general of the United Nations Conference on Trade and Development (UNCTAD), Mukhisa Kituyi expresses concern in the face of trade wars .
If, in the past, conflicts favored the conquest of new territories and domination among peoples, today, they threaten the order established by the World Trade Organization (WTO).
As Kituyi’s text reports, the average value of trade tariffs in the world has been reduced by 85% since 1947, the year in which the General Agreement on Tariffs and Trade (GATT) was signed.
The document formalized an international effort for multilateral cooperation that, combined with advances in technology, raised the share of trade in world GDP from 24% to almost 60%.
In practice, countries started to work together , reducing protectionist measures and opening their markets to collaboration at a global level.
This decision has generated widespread economic development, increasing jobs and the average income of families in rich, poor and developing nations, as well as offering support to alleviate the poverty of 1 billion people in the last 20 years.
Of course, advances in trade also contributed to negative factors, such as the destruction of natural resources , economic concentration and even the formation of monopolies in some markets.
However, removing and reinforcing rivalry between countries and regions – through conflicts such as trade wars – does not help to combat these problems.
See, below, other negative impacts for the world population when the economic dispute becomes a war.
Disadvantages
Each trade war has its particularities, but there are common harmful effects due to these conflicts.
The first, of course, affects the population of the countries directly involved in the battles.
Agricultural producers, ranchers, industrialists and traders may find it difficult to export the items produced , especially if the rival nation traditionally imports a large part of them.
In this way, different productive sectors lose profitability, making companies need to cut costs.
They then reduce production , consumption and end up laying off employees to compensate for the loss, affecting the service sector.
Another impact comes from the decrease in the supply of products, as countries stop buying from their rival.
The trend is that the demand for these items will increase and the supply will be reduced, causing a rise in prices and a reduction in the purchasing power of the population in general.
If this situation lasts for a long period, it can cause economic crises in nations at war, which stop buying from other countries, harming those who do not participate in the trade war.
The scarcity and price of products lead to a context of economic instability , animosity and isolation between nations, which can give rise to new conflicts.
In the words of Mukhisa Kituyi:
“The damage caused by a full-blown trade war would be felt well beyond international trade. The current trade climate reflects a worrying global trend towards nationalist unilateralism. The easiest way to win a trade war is to avoid it altogether.”
Benefits
The advantages of a trade war usually apply to nations that maintain a close relationship and provide alternatives to the rival country’s products.
As a result, soybean farmers sold US$7 billion more to Beijing in 2018, while cotton farmers sold an additional US$358 million.
Beef exporters registered an increase of US$ 557 million, and pork exports, US$ 202 million.
Manufactured goods, such as machines and auto parts, were more purchased by the United States , leading to an increase of US$ 1.2 billion in 2018.
General Consequences Of The Trade War In The World
Taking as a reference the consequences of previous trade wars, it is worth mentioning the following aspects:
- Economic instability leading to possible recessions
- Stock market crashes
- GDP reduction and world economic growth
- Polarization, caused by supporting one nation at the expense of its rival
- Threats to the international trade order, because of the breach of rules established in agreements of the World Trade Organization (WHO)
- Unemployment and drop in productivity
- Reduction in the purchasing power of the population, due to the increase in unemployment and in the prices of some products
- Decreased profitability in the three productive sectors: industry, commerce and services
- Popularization of protectionist measures
- Dollar devaluation and tendency to appreciate local currencies, such as the euro
- Increase in exports from some countries that are not involved in the trade war
- Formation of new alliances between countries, usually with a view to retaliating against the taxation of their products
- Reinforcement of animosity and lack of tolerance between nations.
How Did The US-China Trade War Start?
We mentioned earlier that the main trade war today is between the United States and China.
The disputes began with a change in the posture of the US , which has intensified the adoption of protectionist measures since 2018 – the year in which Donald Trump was elected president.
That’s because Trump always criticized the country’s trade balance during previous administrations, which remained unfavorable for Americans in relation to other nations.
In short, an unfavorable balance of trade means that a country imports more products than it exports, and this is what happened in transactions with China.
With the aim of turning this game around, the American president has started a series of trade battles against nations with whom he has trade relations.
In addition to the Chinese, Mexico, the European Union and Canada suffered from the imposition of tariffs by the US, which aim to privilege the domestic market.
In March 2018, Trump kicked off the conflict with China, setting import tariffs on two of the main items purchased from Beijing: 25% on steel and 10% on aluminum.
In retaliation, the Chinese announced higher tariffs on the import of 128 North American products, especially soybeans.
Since then, there have been a series of threats, taxation and retaliation , culminating in tariffs on US$250 billion worth of Chinese goods by the US in 2018 and US$110 billion worth of US goods taxed by China.
Despite the economic nature of this conflict, experts believe that there are geopolitical reasons behind the battles.
After all, although the US still maintains its position as the world’s largest economic power , China has been a threat to its power for some years, registering high growth rates and gaining prominence in several markets.
This fierce competition provokes reactions in a considerable part of the American population: the 40% that support Donald Trump’s international policy.
They agree with a tightening of relations with China, with the aim of weakening that country’s market.
Consequences Of The US-China Trade War
According to this analysis published by the BBC, it is worth mentioning six main changes , arising from two years in which countries remained in economic conflict.
We comment on each of them below.
Slowdown In The Economy
Do you remember the world economic crisis of 2008?
The sale of bonds, including high-risk debt, to investors around the world and the bursting of the US housing bubble led to the failure of banks such as Lehman Brothers, as well as billions in losses for other financial institutions.
The result was a deep recession, with lost profits and high unemployment rates in several countries.
World GDP reached 1.8% that year, registering a negative result (-1.7%) in 2009, but has been recovering, having reached 3.9% in 2018.
But that scenario is about to change.
The economic fallout from the US-China trade war prompted the International Monetary Fund (IMF) to lower global growth expectations for 2019 to just 3%.
This is the lowest GDP since the 2008 recession.
The main players in the trade war are also growing at a slower pace .
The US target for 2020 stood at 3%, but will likely not be met.
And China is expected to grow by less than 6%, the lowest rate in the last 30 years, according to the World Bank.
Reduction In The US Trade Deficit
We explained above that Donald Trump’s main argument for starting the trade war was to close the gap between imports and exports with China.
In a way, the strategy was successful .
Between November 2018 and November 2019, the trade deficit fell by US$60 billion.
However, US imports of goods are still $360 billion more than exports.
Fall In US Agricultural Exports To Beijing
If, on the one hand, the US imported fewer Chinese items, on the other hand, China imposed tariffs that reduced the import of US agricultural products.
In terms of values, it is possible to have an idea of the drop, which was quite expressive: from US$ 25 billion to less than US$ 7 billion.
Chinese Invest Less In The US
As might be expected, Chinese companies have reduced investments in the United States.
Values dropped from $54 billion in 2016 to $9.7 billion in 2018, and $2.5 billion in the first quarter of 2019 , according to a survey by the Enterprise Institute in Washington.
Tension Hurts US Multinationals
The trade war does not appear to have discouraged US companies with operations in China, but it has had adverse effects on business.
In 2019, 81% of these companies reported being harmed due to conflict , according to data from the US-China Business Council.
In 2017, this rate was 36% lower – that is, only 45% of entrepreneurs said they were concerned about negative impacts resulting from disputes between countries.
Restrictions On Tech Companies
In one of the chapters of the trade war, Trump inserted Chinese companies focused on technology, such as Huawei, into a restrictive treaty .
In practice, US companies cannot do business with them.
In contrast, China has taken a similar approach, drawing up a list of restrictions for US companies.
Latest News On US-China Agreements
The last episodes of the trade war have eased tensions and signal a brief end .
On January 15, 2020, Donald Trump and Chinese Vice Premier Liu He signed an agreement that promises to stabilize their trade relations.
By signing the document, Beijing pledged to purchase $200 billion worth of US goods, narrowing the US trade deficit over the next two years.
A month earlier, nations had taken an initial step towards consensus , canceling the next round of tariff sanctions.
Washington planned to tax $160 billion on Chinese items such as clothing and video games, prompting Beijing to retaliate by imposing tariffs of 25% on cars from the US and 5% on auto parts.
Despite signs of reconciliation , the second phase of the trade agreement was affected by the recent pandemic caused by the coronavirus .
The atmosphere of rivalry between the two superpowers was evidenced by exchanges of accusations about the origins of the virus, which has the Chinese city of Wuhan as its epicenter.
In mid-March, a member of the Chinese Foreign Ministry caused controversy by insinuating that US Army fighters brought Covid-19 (a disease caused by the new coronavirus) to China.
