Introduction

Trade war is a situation in which countries try to damage each other’s trade. It is an economic conflict between two countries in which a country raises or creates tariffs

(a type of  tax imposed on imported goods and services) or other trade barriers against each other in response to trade barriers created by the other state.

typically by the imposition of tariffs or quota restrictions on imports.

 Two main methods of restricting trade are:

  • Tariffs (a type of tax imposed on imported goods and services)
  • Quota (limited amount of goods can be imported)

 Other methods of restricting trade are:

  • Standards (laws or regulations of a nation to restrict imports)
  • Subsidies (grants of money given to domestic producers to lessen the cost)
  • Embargoes (stopping exports and imports of a product or group of products to a country)

Reasons of occurrence of Trade War:

  • Trade wars can commence if one country perceives another country’s trading practices to be unfair
  • when domestic trade unions pressurise politicians to make imported goods less attractive to consumers.
  • Trade wars are also a result of misunderstanding about the widespread benefits of free trade.

Effects of trade war on countries:

  • A trade war that begins in one sector can grow to affect other sectors.
  • A trade war between two countries can affect other countries which are not initially involved in the trade war.
  • In the short run, trade war may work as a nation starts it to protect domestic industry and create jobs. A situation in which countries try to damage each other’s trade, typically by the imposition of tariffs or quota restrictions.
  • But in the long run, a trade war costs jobs and depresses economic growth for all countries involved. It also triggers inflation when tariffs increase prices of imports.
  • A global trade war could hurt consumers around the world by making it harder for all companies to operate, forcing them to push higher prices onto customers.

Mercantilism:

Mercantilism was the main economic system (policy) of trade utilised from the 16th to 18th century in Europe. Mercantilism is an economic theory and practice where the government seeks to regulate the economy and trade in order to promote domestic industry – often at the expense of other countries. Mercantilism is associated with policies which restrict imports via tariffs and increase stocks of gold and protects domestic industries. China is said to be practicing Mercantilism in a modern form by becoming the “manufacturing powerhouse” of the world. Almost all countries have started outsourcing their manufacturing to China, which exports them around the world and Generates heavy foreign exchange. This import restriction along with export promotion policy of China distorts trade.

Protectionism:

Protectionism is a trade policy of protecting domestic industries against foreign competition by means of tariffs, subsidies, import quotas, or other restrictions or handicaps placed on the imports of foreign competitors.

The protectionism policy is good as it-

  • contributes to the development to the certain industries in the country.
  • is a necessary condition for industrialisation of agrarian countries.
  • helps in unemployment reduction.

The protectionism policy is not good as-

  • the removal of foreign competition reduces the interest in scientific and technological progress,
  • the removal of foreign competition reduces the interest in improving the efficiency of production.

United States of America is said to be following a Protectionist Policy since Presidential Election of Donald Trump. Under this policy, USA has imposed tariff and non-tariff barriers on MNCs as well as its domestic industries to produce in the USA. The policy aims at reviving “Made in USA” Image of United states.

Protectionist policy of USA has kick-started a Trade War around the world where more countries are now following the same strategy to increase their export earnings and reduce import burden.

The problem with protectionist policy is that it creates an imbalance of export where every country wants to export but no country is willing to import.

Free Trade policy:

Free trade is a trade policy that does not restrict imports or exports; it is the idea of the free market as applied to international trade. Buyers and sellers from different economies may voluntarily trade without a government applying tariffs, quotas, subsidies or prohibitions on goods and services. Free trade is the opposite of trade protectionism. This is referred to as “laissez-faire trade” or “trade liberalisation.”

Free trade is helpful in-

  • eliminating tariffs and makes corporations more competitive in foreign markets.
  • generating foreign currency and opens foreign markets and lowers barriers.

On the other hand, it is harmful as it leads to-

  • unemployment,
  • stagnating wages and
  • unequal distribution of wealth.

Breaking down trade war:

International trade policy describes collectively the international laws and multilateral trade agreements that govern the sale of goods between different countries. Some international trade policy is made by transnational institutions such as the United Nations and the World Trade Organization. Countries can negotiate directly with each other to strike a deal; or they can just impose unilateral tariffs on each other’s goods.

The WTO (World Trade Organisation) is the only global impartial organization that regulates trade among the 164 countries that belong to it. It is the international organization whose primary purpose is to open trade for the benefit of all.

About WTO:

  • It is a forum for governments to negotiate trade agreements.
  • It is a place for them to settle trade disputes.
  • It is a place where member governments try to sort out the trade problems they face with each other.
  • The WTO is run by its member governments.
  • The WTO is run by its member governments.
  • All major decisions are made by the membership as a whole either by ministers.

Top 5 trade wars in the world history:

  1. Opium wars 1839 and 1856:

 There are two opium wars in the world history. The first Opium War (1839–42) was fought between China and Britain, and the second Opium War (1856–60), also known as the Arrow War or the Anglo-French War in China, was fought by Britain and France against China. China lost both the wars. 

The First Opium War, fought over opium trade when the British East India Company started smuggling opium from India into China. The opium trade resulted in 4-12 million Chinese addicts and silver began to flow out of the country to pay for the opium. The Chinese wanted to stop the trade. In May 1839 they forced the British Chief to hand over the stocks of opium at Canton for destruction. This outraged the British, and was the incident that sparked conflict. The war ended on 17 August 1842, with the Treaty of Nanking.  The treaty ceded the Hong Kong island to the United Kingdom in perpetuity along with establishment of five treaty ports. The treaty committed the Chinese to free trade, including the trade in opium.

The second opium war, fought during 1856–1860, British forces fought towards legalisation of the opium trade, to open all of China to British merchants, and to exempt foreign imports duties. France joined the British. The war resulted in the second group of treaty ports being set up; eventually, more than 80 treaty ports were established in China, involving many foreign powers. All foreign traders gained rights to travel within China.

  1. Smoot-Hawley Tariff Act-1930:

The Smoot-Hawley Tariff Act, enacted in June 1930 when US president Herbert Hoover signed the Smoot-Hawley Tariff Act introduced by Senators Reed Smoot and Willis C. Hawley. This act increased  import duties by as much as 50% to protect American businesses and farmers, adding considerable strain to the international economic climate of the great depression. In a sign of disapproval towards this act, other countries retaliated and also increased their tariffs. As a result, banks in foreign countries began to fail and international trade declined drastically, resulting in a world trade decline of 66% between 1929 and 1934.In order to decrease the high tariffs imposed, President Roosevelt passed the Reciprocal Trade Agreements Act in 1934. This act allowed the President to negotiate tariff reductions on a bilateral basis.

  1. Chicken war- 1960:

The EU and US engaged in a trading conflict From 1961-1964 that later came to be known as the Chicken War. After the Second World War, the US switched to factory farming chickens and flooded the market with cheap poultry. North-American chicken consumption in West Germany alone increased by 23%. In 1961, to protect their producers France, West Germany and several European states imposed tariffs and price controls on US-imported chicken. The US retaliated with imposing higher tariffs on a bunch of commodities including French brandy and Volkswagen buses. It even threatened to cut NATO troops to Europe.

However, consumers from both sides of Atlantic ocean were the real losers.The “Chicken Tax” remains in place today and is still affecting consumers and industries.

  1. The Pasta War -1985:

The Pasta war of 1985 began when US president raised tariffs on Pasta from Europe to protect domestic pasta makers and Europe then struck back by putting tariffs on U.S. lemons and walnuts. The standoff lasts nine months, before the US and EEC reach an agreement.

before the situation escalated into a full-fledged trade war.    

5.The Banana War-1993:

 This trade disputes began in 1993 between the European Union, the United States and several Latin American countries concerning access to Europe’s banana market.

Europe imposed heavy tariffs on import of Latin American bananas in 1993 to restrict import of Bananas to its colonies in Africa and Caribbean. The US filed eight separate complaints in the WTO. The EU agreed in 2009 to gradually reduce tariffs on bananas from Latin America. However, it is only in 2012 that the EU and 10 Latin American countries signed an agreement to formally end all the eight WTO cases, ending the 20-year long banana war.

Latest Trade war:  

US-China trade war- 2018:

 

 

 

Towards the beginning of the year, the President of the United States of America, Donald Trump, reprimanded China, alleging unfair trade practices and theft of intellectual property. The United States is perhaps one of the biggest consumers of Chinese goods. Hence, souring trade relations between the two meant economic implications for the Asian nation.

The war between US and China took place gradually as shown in the table:

Jan 22- US imposes tariffs of 30% and 20% on solar cell and washing machine imports.

Mar 9- US imposes tariffs of 25% and 10% on steel and aluminium imports from all nations including China.

April 2- China slaps duties on $3billion of US imports including 128 categories of goods.

MAY 28- US accuses China of theft of technology.

July 6- Tariffs begin on $34 billions of Chinese products. China introduce an equivalent tariff on us import worth $ 34 billion.

Aug 23- Tariff begins on $16 billions of Chinese imports. China responds with $ 16 billions on levy on U.S imports.

SEP 24- U.S. levied tariffs of 10% on $200 billions of Chinese products that include furniture and appliances, with the rate set to increase to 25 percent by year-end.

In response, Chinese government imposed taxes on 5,207 kinds of U.S. products, valued at about $60 billion.

Agreement between US and China- December 2018 :

In G20 summit meeting on 2nd December, US President Donald Trump and his Chinese counterpart Xi Jinping have agreed to halt new trade tariffs for 90 days to allow for talks. In this agreement-

  • Mr Trump agreed not to boost tariffs on $200bn (£157 billion) of Chinese goods from 10% to 25% on 1 January.
  • China will buy a “very substantial” amount of agricultural, industrial and energy products to reduce the trade imbalance between the two countries.
  • The two sides agreed to open up their markets.

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