Trade Wars: History, Pros & Cons, and U.S.-China Example

What Is a Trade War?

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

Trade wars can happen if one country believes that another has unfair trading practices. Trade unions or industry lobbyists can pressure politicians to make imported goods less appealing to consumers, leading to a trade war. Trade wars can also arise from a misunderstanding of the benefits of free trade.

Key Takeaways

• A trade war occurs when one country raises import tariffs or places restrictions on another country’s imports.
• Trade wars are a result of protectionist policies and are controversial.
• Advocates argue that trade wars protect national interests and benefit domestic businesses.
• Critics claim that trade wars harm local companies, consumers, and the economy.

Understanding a Trade War

Trade wars are a side effect of protectionism, which refers to government actions that restrict international trade. Countries may implement protectionist measures to protect domestic businesses and jobs, and to balance trade deficits. Tariffs, taxes imposed on imported goods, can have detrimental effects on the economies of both nations involved.

A trade war can start in one sector and affect other sectors, as well as countries not initially involved. This "tit-for-tat" battle can result from a protectionist inclination.

A trade war differs from other actions to control imports and exports, such as sanctions. Sanctions may have philanthropic goals in addition to trade-related ones.

Protectionist policies include import quotas, product standards, and government subsidies to deter outsourcing.

History of Trade Wars

Trade wars have existed since nations began trading with each other. In the 17th century, colonial powers fought over the exclusive trade rights to overseas colonies.

The British Empire engaged in trade battles, such as the opium wars with China in the 19th century. The conflict began when China made opium illegal, but the British navy ultimately prevailed, forcing China to allow more foreign trade.

In 1930, the United States enacted the Smoot-Hawley Tariff Act, raising tariffs on European agricultural products to protect American farmers. Several nations retaliated by imposing higher tariffs, leading to a decline in global trade. To counteract this, President Roosevelt passed acts to reduce trade barriers.

In 2018, former President Trump imposed tariffs on various imports, particularly from China. China retaliated with its own tariffs. The effects of the trade war were shouldered by U.S. importers, leading to higher prices for consumers.

Advantages and Disadvantages of a Trade War

Debates over the pros and cons of trade wars and protectionism are ongoing. Proponents argue that protectionist policies provide competitive advantages by supporting domestic businesses, increasing demand for local goods, and promoting job growth.

• Protects domestic companies
• Increases demand for domestic goods
• Promotes job growth
• Improves trade deficits
• Punishes nations with unethical trade policies
• Increases costs and induces inflation
• Causes shortages and reduces choice
• Discourages trade
• Slows economic growth
• Hurts diplomatic relations and cultural exchange

Critics argue that protectionism hampers long-term economic growth and cultural exchange. Consumers may have fewer choices, experience shortages, and face higher prices. Manufacturers’ profit margins may be affected as they pay more for raw materials, leading to overall inflation.

Example of a Trade War

In 2016, President Trump promised to bring manufacturing jobs back to the U.S. by renegotiating trade agreements and pursuing protectionist policies. He targeted China with tariffs and threats of fines over intellectual property theft.

Throughout 2018, both countries threatened each other with proposed tariffs. These actions impacted the Chinese economy and caused slowdowns. In May 2019, the U.S. increased tariffs on Chinese imports, leading to retaliatory measures from China. The two nations eventually agreed to a trade deal, but tensions resurfaced with the COVID-19 pandemic.

China halted imports of farm products, weakened their currency, and the U.S. increased tariffs further. A trade deal was signed in January 2020, but the pandemic posed challenges to the trade relationship.