Trade Wars: Winter is coming

By September 17, 2018 Trade News
Trade Wars

Since Donald Trump became president of the United States on November 9, 2016, great uncertainty was created in international markets and especially in the World Trade Organization (hereinafter, WTO). Before being elected, the president had already indicated his intention to leave the WTO due to his disagreement with the agreements and treaties that are part of this organization [1] Since 2016, fears about the appearance of commercial wars have risen, and answers against protectionism are becoming more evident. It is increasingly common to see that some analysts write about this phenomenon but, what is a trade war? Which are its consequences? These issues will be resolved below:

What is a trade war?

A trade war is a conflict between two or more nations consisting of actions to restrict the entry of one or several products imported from another nation or a group of nations. The content of the measures can go from the establishment or increase of commercial tariffs to the prohibition of the importation of a specific product. This way of action seeks to improve domestic production, imports, exports, and to create jobs and to revitalize the sector.
 
However, in the face of such unilateral action by one of the parties, the counterpart may respond by adopting similar regulations that will subsequently provoke that the first country adopts new measures in response.
 

What are the consequences of a trade war?

 
The most direct consequence is the increase in prices. That is, consumers pay more for the same product. In addition, this type of commercial disputes leads to the interruption of trade and global supply chains which ultimately produces a damage to the profitability of the companies that import and export.
 
However, not only is the existence of the commercial war harmful, but the threats of having one also have a negative impact on the stock market. In short, there is an impact on global economic growth.
 

And if we take a look at the history …

 
The recent history of the US economy shows us that already in 1930, the United States Congress raised tariffs on certain products with the well-known Smoot-Hawley tariff. As a consequence, many countries raised taxes as well. This took place at the beginning of the Great Depression [2] and it definitely helped to reduce international trade by almost two thirds.
 
In this way, the international community, knowing how destructive economic conflicts have been throughout history, had chosen to resolve trade confrontations by adopting a set of rules imbricated in the WTO, [3] moving away from protectionist measures and embracing liberal politics.
 

What are the new protectionist measures in Washington?

 
The trade balance between China and the United States is unequal in favor of China. This means that the United States acquires more products from China than the other way around. This situation may be observed in the following graph:
Trade War China and US
President Trump’s 25% duties affect 1,300 products belonging to the information and communication technology industries, the aerospace industry and machinery. Below, we can see in more detail the main products nominated by Trump’s Administration:
Blog-Trade Wars China and US
While China’s counterattack focuses on US agricultural products UU as meat, fish, fruits, cereals, alcohol, cotton, etc.[4] The following are the main breakdown products of the Chinese counterattack:
Trade Wars- US and China
Trade wars are never the right instrument to seek economic growth in a region or in a country. In the end, the consumers have to pay the rise in prices and as a consequence, they lose purchasing power, which has a direct impact on the business fabric. In addition, trade wars respond to actions based on an “eye for an eye” that must be kept away from diplomacy and international and economic relations.

Sources:

[1] Tim Worstall (July 25, 2016), Donald Trump’s Ludicrous Idea Of Pulling The US From The World Trade Organisation, Forbes. Available online (link) [Last access: 16.08.2018]
[2] BBC Mundo Redacción (May 31, 2018), Qué es una guerra comercial, cuáles son sus armas y quiénes son sus principales víctimas, BBC. Available online (link) [Last access: 16.08.2018]
[3] Federico Steinberg (March 19, 2018), What you need to know about Trump’s trade war, Real Instituto Elcano. Available online (link) [Last access: 16.08.2018]
[4] Bob Bryan (July 11, 2018) China just slammed massive tariffs on $34 billion worth of US goods — here’s what will get hit, Business Insider. Available online (link) [Last access: 16.08.2018]
 

Charts:

Avi Salzman and Evie Liu (April 9, 2018), The Brewing U.S.-China Trade War, Explained in Charts, Barron’s. Available online (link) [Last access: 16.08.2018]
 

Do you like graphs and infographics? Don’t miss the following!:

Jeff Desjardins (July 18, 2018), A brief history of US trade wars, Business Insider. Available online (link) [Last access: 16.08.2018]

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