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Money News

What’s a Trade War?

March 26, 2018

  • A trade war is when countries wage economic battle using tariffs
  • History has shown that trade wars aren’t good for the economy
  • A trade war is likely to increase costs for consumers
2 min read

A trade war is when countries start waging an escalating battle over tariffs. In response to U.S. tariffs on Chinese goods and services, China could impose tariffs of its own on U.S. steel, agricultural products, and other exports.

Read more about recent US tariffs on aluminum and steel.

That could increase costs for U.S. consumers, and also reduce demand for U.S. exports, which could dent our economy, according to experts.

Why is this happening?

Over the last 30 years, the U.S. has entered into numerous trade treaties.

You may be familiar with the North American Free Trade Agreement (NAFTA). These treaties are complex multilateral agreements that favor negotiations between all countries that sign.

Winning trade wars isn’t easy, as history has shown us.

Agreements like this reduced the threat of trade wars, in part by eliminating many tariffs on exported and imported products.

Trump has argued such agreements have flooded the U.S. with cheaper foreign-made goods, which make it difficult for U.S. manufacturers to compete.

In 2017, the U.S. signed a less comprehensive trade treaty with China, but Trump has said recently that products from China–in particular steel–have cost the U.S. 6 million jobs, and have caused 60,000 factories to close. Economists reportedly dispute these figures.

Trade wars: High school history class flashback

Winning trade wars isn’t easy, as history has shown us. Many analysts are digging back into their history books to remember the Smoot-Hawley Act tariffs and the “trade wars” that collided with the Great Depression of the 1930s.

The Act bumped the average U.S. tariffs to 45 percent from 38 percent. Still, other countries were not happy with the U.S. in the early 1930s. Several countries, including Canada, immediately responded with their own tariffs. Soon other countries jumped into the fray and a global trade war broke out in 1931, thus sparking a European financial crisis.

While Smoot-Hawley has been blamed for worsening the Great Depression, most economists say the conditions that drove down the U.S. economy were far more complex than that. The tariff-related Act was introduced before the Great Depression, although its impact was largely felt during those tough subsequent years.

President Richard Nixon temporarily introduced tariffs back in 1971 to fight stagflation. President George W. Bush briefly introduced steel tariffs in 2003 but repealed them several months later after the tariffs were seen to have negatively affected the economy.

What makes this time different?

The move by this administration is unusual because the president is justifying them on the grounds of national security.

Read more about how China is responding to President Trump’s tariffs.

How can a trade war affect U.S. consumers?

There are concerns that a trade war will increase costs to buy goods for U.S. consumers. There are also concerns that tariffs could cost workers their jobs in various manufacturing industries, as expenses increase.

On the import side, numerous industries depend on cheap steel to manufacture products. Tariffs are likely to increase the cost of steel at home, and those increases are likely to be passed along to consumer in the form of higher prices.

On the export side, China is likely to place tariffs on our agricultural products, which will make these products more expensive to sell in China.

Similarly, tariffs could hit tech companies such as Apple, which reported that more than 20% of its global sales in this past quarter came from China and the greater China region, which includes Hong Kong and Taiwan.

 

By Jeremy Quittner
Jeremy Quittner is the financial writer for Stash.

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