Economic power has long dominated the priorities of nations and one of the key ways to procure, unleash and expand this power remains international trade, which constitutes the exchange of capital, goods and services across international boundaries. While international trade potentially tends to facilitate exchange of necessary goods and services, expand market, increase GDP, develop competition and enhance consumer choice, it can also moderate political hegemony, harm domestic producers and raise consumer prices. However, its uncommon and extreme aspects can possibly prove to be deleterious for some or most of the players involved. One such bizarre economic occurrence is a trade war.
A term used for economic conflicts resulting from and causing the rise of cyclical and extreme protectionist policies amongst nations, a trade war can and has wrecked havoc in even the most powerful of countries. Often, both the causes and consequences of such policies go beyond rational economic reasoning, for they are extreme and recurring and can cause a lasting impact on a country’s trading capacity and relations.
How did trade wars come into being? How do they unveil themselves in economically differing nations? How are respective stakeholders affected during these wars? Are these effects necessarily adverse? Questions such as these remain pertinent, complex and consequential.
The answer to the first question is largely straightforward. With the end of the Cold War, the consequent rising impact of ‘soft’ and economic power, establishment of international organizations (possessing the potential to facilitate diplomatic channels to mediate conflicts) and repercussions due to lasting damages and drainage of resources after years of engaging in warfare, the fall of direct, military confrontations on the international stage and their substitution by economic conflicts and incentives was inevitable.
The tensions in trade between the United States and China provide the most recent depiction of a trade war. While the US president has so far authorized heavy tariffs on almost $250 billion worth of Chinese imports in order to deter drainage of investment and intellectual property from the country, China has responded with its own retaliatory rounds of tariffs. Such reactionary and cyclical tariffs are symptoms of the outbreak of an economic war indeed.
Generally, protectionist policies are applied to shield domestic producers from rampant competition or achieve conditions near autarky. However, they have also been used as a measure to coerce or implement a needed political behaviour, like in the case of USA and Iran or North Korea. The consequence of aggressive and cyclical protectionist policies can vary according to the respective stakeholders.
The prominent stakeholders in a trade war are the two conflicting countries, those holding trade relations with these two countries and consumers at a micro level. Holistic global growth and international peace are also pertinent factors.
Usually, one of the two countries majorly exports while the other majorly imports. So, the United States is relatively the importer and China largely the exporter. In a trade war, exporters are generally more vulnerable for their output growth relies primarily on exports, which are terribly impacted by high tariffs. Thus, in a series of the imposition of tariffs, the importer country can outlast the exporter country as the primary threat is that of rising prices and not of plummeting production, with the latter threat being far graver for any economy. However, it is clear that both countries lose in the long run as they’re left with differing magnitudes of inflation, insufficient demand and low output growth.
While one country may ‘lose less’ at the cost of another, the consumer holistically loses because tariffs not only increase general price levels but also limit choice and thus their bargaining power. As far as domestic producers are concerned, depending on the state of the domestic economy in terms of levels of production and industrial development, extreme protectionist policies can either enhance domestic production or disincentivize enhancement in its quality.
Other countries depending on export markets in the conflicting countries tend to buy from and sell to markets that are much more stable and lucrative; such nations can suffer too if they’re left with meagre alternative sources of exports and imports, causing global growth to suffer. So, due to a trade war, movements of goods and services is interrupted, political tensions escalate and investments are bound to fluctuate due to rising economic and political instability. A large-scale exploitation of imbalances in trading powers thus has large and powerful costs.
It is fair to conclude that trade wars are bad for all. While they might seem beneficial for a few countries in the short run, fluctuations in output are likely to cause inflation and no real output growth in the long run for shocks and instabilities in an economy interfered with consumer choices and supply-demand equilibrium. In fact, such major impacts are likely to lead to a more direct and aggressive confrontation than to simply serve as a means of letting off some steam. Trade wars are therefore more of catalysts than deterrents.
Contrary to what many governments might state, there are better methods to deal with international quarrels. Instead of threatening tariffs, subsidies are a less aggressive method to protect domestic producers or to facilitate a change in the distribution of exports and imports, especially for developed economies that are capable of funding such transfers. The relevance of the long run economic slowdown must be prioritized by political structures. Diplomatic channels must be fully utilized to resolve conflicts, with international organizations like the World Trade Organization and World Bank stepping up to not only generate better solutions but also to nudge the conflicting countries to implement the same. To make sure that these bodies themselves are not vulnerable to biases, certain changes in the structure of distribution of power among nations within them must occur; their sources of funding must be diversified so they’re not dependent on or unfair towards particular countries.Trade wars wreck havoc, cause structural damages and drastically impact livelihoods. It is wise to remember that to win such a war, one must lose first.
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