What is a trade war?
A trade war is when countries impose tariffs on each other in an attempt to level the playing field with respect to manufacturing costs and cost of living in the different locations. Unfortunately, Governments sometimes impose tariffs to give their local manufacturers a trade advantage. In either case, tariffs result in counter tariffs.
Trade wars slow down business activity around the globe by restricting international trade. Trade wars have lead to global depressions like “The Great Depression”
Ask any economist and they will tell you that no one wins a trade war.
Some less informed leaders believe that a trade war is “good” and “easy to win.” but here are the facts.
Prices will go up
In a trade war, consumers and businesses have to pay more and pass that on to their consumers.
Tariffs imposed on raw materials effect the price of finished goods. When imported materials cost more, local producers tend to raise their prices to create a higher overall market price. No one wants to leave money on the table.
The bottom lines is that everyone pays more.
Businesses will lose sales
Trading countries will retaliate with tariffs and restrictions on goods and services, making them more expensive, and less competitive.
When companies lose contracts to sell their products in other countries, it can take a long time to win that business back. Their customers will find other, more dependable suppliers while the trade war is waged and have no reason to switch back if things return to normal.
With a lack of exports comes a lack of jobs and those jobs will be in all sectors of the market. Products will be effected first, but services may have a bigger impact.
In some cases countries negotiated to protect things like patents as part of trade deals. If the deals fall apart, the negotiated conditions will no longer be binding.
Trading partners tend to also be lenders
Many of the first world countries are carrying large debts and those depts are being financed by countries that they trade with.
If trade is restricted there is no motivation for trading partners to finance debt so interest rates will go up. With higher interest rates, banks will be much more cautious when it comes to personal and business loans making it harder to get money. If countries default on debts their credit rating is negatively effected and it is that much harder for them to recover after the fact.
A lack of financing will effect new business and home starts and banks may be forced to foreclose on assets in order to deal with loan defaults.
The end result is a stagnant economy that slides into a depression.
How do we avoid a trade war
If a country tries to start a trade war, they don’t understand the fundamentals of trade. A lack of leadership and understanding takes years to fix, so it’s best to let them be.
Countries with more experienced and reasonable leadership should seek each other out and strike new relationships to rebalance global trade.
The bottom line is “No one wins a trade war”