A trade war is the confrontation between two or more countries through the imposition of tariff and non-tariff barriers.
Trade wars can be generated for two main reasons:
- It is desired to protect local industry to the detriment of foreign producers, and
- It is desired to improve the trade balance byreducing the deficit.
To carry out this action, governments use the following tools:
- Tariff barriers: Tariffs are imposed on the commercialization of goods, either on imports or exports, or both. In this way, foreign trade becomes less attractive to companies. Because the rate increases the price of products for buyers.
- Non-tariff barriers: With this type of measures, specific restrictions on trade are imposed. For example, a commercialization fee is established in monetary units or amounts for a certain good or service. It can also be completely disabled. Another example would be to establish cumbersome requirements that discourage entrepreneurs.
Protectionism and trade war
Protectionist policies are contrary to free trade and the free market . While it represents restrictions on economic activity, the motivations are not necessarily to keep them long term. For example, a government may be interested in the proliferation of the textile industry. Since it is a fairly competitive sector, it can establish trade barriers that allow it to be developed locally. Subsequently the measure can be reversed.
However, it can also be the case that the protectionist measure only seeks to favor a particular group. This, without any economic consideration in this regard. These are the most damaging measures for countries.
Balance of payments and trade war
Reducing the trade deficit is another important motivation to implement trade barriers. Therefore, the country in question reduces financing to external activities to reverse it and boost the national industry. Since trade deficits imply the impulse of foreign economies.
Benefits of trade wars
The national industries that are favored by protectionism are privileged. Either by unfair competition or to encourage its growth. Since these companies may experience an increased demand for their products or services. Finally, local employment is encouraged and there are possibilities to invest in the activity.
Harm of trade wars
Trade wars generate immediate negative effects on consumers:
- The product or service becomes more expensive, reducing consumer surplus. That is, inflationis generated .
- The supply of products is reduced, preventing consumers from acquiring the amount they want or need.
- These options discourage consumption, that is, the utilityof buyers is reduced .
Geopolitics and trade wars
A country may impose restrictions on trade with another country by considering its unfair or unethical practices. The sensitive industry of another can be punished with the imposition of these measures and affect their economic growth. The purpose of this action is to change the economic policies of the counterpart.
Unfortunately, as a consequence, diplomatic relations between nations deteriorate. In addition, cultural exchange can stop as a result of confrontation.