What do you think of when you hear the word “war?”
Is it this?
Or maybe this?
Well, there’s a different type of war you may have heard a lot about recently.
Trade war worries igniting.
Is the trade war back on?
Trade war.
Full-blown trade war.
The “weapons” in a trade war are everywhere.
It's the food you eat.
The train you ride to work.
And the laptop you’re probably watching this video on.
As a consumer you're probably consuming imports.
If we have a trade war and we start slapping tariffs on all of those imports, the bill
is going to be higher.
If the world relies so much on trade, what is a trade war and why do countries get caught
up in them in the first place?
Alright, global trade can be a dry topic so let’s jazz this up a little bit.
To avoid any spoilers, let’s say it’s season one of Game of Thrones and both the
Tyrell and the Lannister kingdoms manufacture… googly eyes.
The Tyrells then start to subsidize googly eye manufacturing in their kingdom.
That basically means that the Tyrells are paying at least part of the cost of manufacturing,
reducing the cost for buyers.
The Lannisters are understandably upset — why would anyone want to buy their more expensive
product?
They could try and negotiate with the Tyrells or they could choose to impose tariffs: taxes
on imports that raise the cost of those goods.
Which in this case, would punish the Tyrells.
With the tariffs in place, if the Tyrells tried to export goods to the Lannisters, they’d
have to pay an extra tax.
The Tyrells could then impose tariffs of their own.
Now if this disagreement goes back and forth and escalates with even more tariffs, that
would be considered a trade war.
But trade wars aren’t fiction and there’s more than one way they can start.
One possibility is you want to keep out countries import so that your domestic competitors
have an edge.
The second possibility is if there's a country that is doing something that you don't want them to,
you can use a tariff as a way of inflicting a degree of pain, of economic pain on that
country.
And you say until you change your evil ways I'm going to make it hurt.
Okay, so who “wins” a trade war?
One way to think about who “wins” a trade war is looking at which country has more targets
to choose from.
The more goods you ship to another country, the more vulnerable your goods are to punishing
tariffs.
So some economists would say that the country which ships fewer goods to the other has an
advantage — and can outlast the other in a big clash.
Trade wars can also boost the fortunes of countries that stand outside the fray.
In the 1930s, the US enacted the Smoot-Hawley Tariff Act which put into place steep, sweeping
tariffs on imports as a way to protect American workers and industries.
Canada and some European countries put up tariffs of their own, launching a trade war.
Some of these countries then abandoned the US as a trading ally and took their trading
elsewhere.
Soviet Russia, a country not involved in the trade war, ended up gaining trading partners as
a result of Smoot-Hawley.
So sometimes countries not involved in a trade war can benefit from one.
But, as is the case with most wars,
trade wars are harmful for almost everyone involved — particularly
for poorer consumers.
Rising prices in a trade war can have ripple effects.
When people have to spend more money on basics like clothing,
it means they have less money to spend on other goods and services.
And that can dampen the pace of the economy.
Traditionally when you've looked at trade protection, you often put higher protection on goods that are
consumed by poor people.
There are economists who have documented that systematically you tend to find higher tariffs
on things like low-end clothing, shoes, sugar, which play a disproportionate
role in the spending of people who are less was well off.
In April, President Trump unveiled a list of over 1000 Chinese exports — things like
aircraft parts, TVs, and medical devices — that he planned to place tariffs on, as a way to
to punish Beijing for restricting US investment in China and for stealing American intellectual
property.
The very next day, China struck back, unveiling its own list of US exports that it planned
to place tariffs on.
Since then, Trump has threatened another round of tariffs, with China ready to respond with
its own additional tariffs.
The whole situation is starting to look a lot like a trade war.
Countries disagree on fair and unfair trade practices all the time.
But there’s something unique about Trump’s approach to it: the unpredictability, the
wild threats, the disinterest in even pretending to play by the rules.
Trump isn’t just destabilizing trade relations with China or any other country he threatens
— he’s destabilizing the entire global system of trade.