In trade war, countries raise tariffs and other barriers to exports in an attempt to protect domestic industries from competition. This can lead to higher prices for consumers around the world.
Trade wars have been a part of commerce for as long as nations have traded with one another. For instance, during the opium wars of the 19th century, China blocked British exports to punish the UK for importing Indian-produced opium. Today, trade wars are mostly a result of political disagreement and protectionism.
While the idea of protecting national industries sounds logical, it is rarely successful. Many richer countries have shifted away from manufacturing economies in recent decades to service economies, focusing on areas such as banking, travel and tourism. However, in the process, they have weakened their economic bargaining power when negotiating trade agreements with other nations. As a result, their exports of services are less competitive in international markets.
To combat this, some countries enact protective tariffs to boost the value of their exports. While this may help to increase domestic demand, it often results in other countries raising their own tariffs in retaliation. As a result, all sides lose out from increased costs and lower productive efficiency. The US president’s latest round of tariff increases are a clear example of this. The administration has imposed levies on hundreds of billions in Chinese goods. Its claims are that these tariffs will decrease the trade deficit with China, bring back manufacturing jobs and force Beijing to reform its trade practices — including intellectual property theft.
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