Among the key issues on the global economy in 2018, especially in its second, is trade war. Of particular interest has been the economic and business relations between China and the United States. In the second week of August 2018, trade war discussions have involved the US and Turkey. This piece attempts to share some perspectives on this matter.
Trade War Concept
Trade was is a situation in which countries try to damage each other’s international trade. International trade involves imports and exports of goods and services. Typically trade war takes the form of imposition of tariffs or quota restrictions. It is an economic conflict resulting from extreme protectionism.
In this case, countries raise or create tariffs or other trade barriers against each other in response to trade barriers created by the other party. Normally a country in a trade war would impose tariffs and non tariff barriers on imports. Trade war may have its base in economic and business matters. However, it may be waged based on non economic and business reasons such as politics.
It is very important to understand the way trade war is fought for it to attain its targets of weakening the enemy’s economy. The main trade war tool that is used is tariffs. A country would impose a relatively high on goods and services imported from its enemy. Where the tariff already existed, the normal way is to hike the rate to uncomfortable rates.
When tariffs are imposed or hiked, the price of the targeted goods and services go up by at least the rate of the new tariff. This discourages importers. If they have alternative sources of supply they will import from elsewhere. The targeted country will therefore experience reduced exports and related revenues and associated many and far-reaching implications of this.
There may be a situation where there are no alternative sources of supply of the goods and services whose prices are hiked thanks to tariff hikes due to trade war. In this case, the trade war may affect producers and at the end consumers in the country hiking tariffs. This is because tariff will hike price. If it is a tariff on raw materials then prices of goods and services produced by the raw materials will go up. This is also true for tariff on final products.
The types and extents of effects of trade war depend on a number of factors. These include the magnitude of the war like types and rates of tools used such as tariff and non tariff barriers, the extent of market diversification of the goods and services used as tools in trade war and length of the war and responses of the targeted country among others.
Trade was is bad for consumers, producers, governments against which trade war is fought and workers. It potentially reduces international trade flows. It can lead to economic crisis and melt down, collapse of markets including stock markets, results in foreign exchange scarcity due to reduced exports and therefore affecting a country’s strength of local currency, Balance of Payment and associated implications such as reduced months of import support.
Depending on extent and countries involved, trade war can be contagious and negatively affect many countries and possibly global economy. The August 2018 trade war between the US and Turkey, for example, could arguably affect economic and business prospects of emerging markets. If unchecked, the Sino-American trade war on its side can affect the global economy given the weight of the two giants in the world economy.
Among the dangers and evils of trade war is retaliation. This is the situation in which a country fights back when its exports are affected. Countries can retaliate by likewise imposing or hiking tariffs or boycotting goods and services it imports from its enemy’s jurisdiction. In this case the two countries imports and exports are affected. Outcomes of retaliation depend on the nature, type and amounts of international trade taking place between the two countries.
One country may be more affected than the other. However, there may be a situation of zero sum game where no one wins and no one loses as the effects cancel themselves out. In the Sino-US trade war China is said to have retaliated by increasing tariffs on some of its imports from the US. In the August 2018 US - Turkey trade war, the latter called for retaliation in shapes and forms of boycotting purchasing of US electronics goods. It needs empirical studies to see the net effects of retaliations.
Among the cases of trade war in August 2018 have been the Sino-American trade war and the trade war between the US and Turkey. The Sino-American trade war has taken the form of the USA using the tariff tool of trade war by imposing higher than normal tariff on steel imported from China. On the part of Turkey, the US used the same tool by imposing higher tariff rate on steel and aluminum. The expected result is for the goods whose price will be higher thanks to the tariffs to be less imported.
This will result in reduced exports sales volumes, sales foreign exchange revenues and the many and far-reaching negative implications of the same and reduced sales profits for producers. If this goes on for long time, producers have to respond rationally.
Rational response in market economy will be to reduce or stop production depending on the nature of market dependence. Reduced production leads to reduced employment meaning increased unemployment with its many social and economic evils. Generally, trade war is a bad deal for the global economy. It is against the spirit of free trade and its benefits.