What's a Trade War and Do I Really Need to Care?
Trade wars are the petty schoolyard fights of international politics, only with billions of dollars and thousands (maybe millions) of jobs on the line.
You’ve seen stories on the news about the Trump administration’s ongoing trade war with China, but is that really what’s going on here? In fact, what is a trade war anyway? And if it is happening, is it something that you really need to know about?
We have all those answers, and more…
On tariffs and international trade.
Okay, in order to explain what a trade war is, we first need to talk about tariffs and international trade.
Tariffs are a tax on imported goods (or goods that are produced outside the country). The purpose of tariffs is to protect domestic industries by making imported products more expensive.
It’s important to note that tariffs are paid by the persons or companies importing the stuff. For all the talk of levying tariffs on foreign countries, it’s the importers who are actually shelling out.
Up until 1913, when Congress instituted the income tax, tariffs were how we funded the U.S. government. As such, we had a lot of tariffs back then, at an average rate of 15%.
After the income tax was established, America’s tariff rates steadily dropped until the Great Depression. In 1932, Congress enacted the Smoot-Hawley tariffs, which were aimed at protecting American jobs by hiking rates an average of 50%.
Many people think that those Smoot-Hawley tariffs hindered international trade, which ended up making the Great Depression worse. And, as tariffs raise the cost of importing foreign goods, they do generally have a dampening fact on international trade.
Although the purpose of tariffs is to give domestic manufacturers an advantage over their foreign competitors, there is a lot of debate as to whether they are helpful or harmful to the economy.
After all, cheap foreign steel might hurt the domestic steel industry, but it can be a great boon to domestic car manufacturers who are able to improve their profit margins and lower their prices.
We’re not here to settle that debate, today. But it does help to remember that economies are massively complicated. When one particular sector gets a boost, it often comes at another sector’s expense.
What is a trade war?
When you were in grade school, you probably got into lots of petty fights on the playground. A kid would run over and slug you in the arm, so then you’d do the same. In retaliation to your retaliation, they’d kick you hard in the shin, so you’d kick them in their shin, and so on.
This isn’t exactly how trade wars work … but it’s not that far off.
We mentioned earlier that tariffs are paid by importers, not by countries themselves. But that doesn’t mean that the countries are unaffected. Higher tariffs will either mean lower prices paid for their goods or a decrease in exports. Either way, their economy is going to take a hit.
As such, when one country imposes new tariffs or dramatically hikes their existing rates, the opposing country will sometimes retaliate. “You want to raise tariffs on our steel?” they (metaphorically) say. “Well then, we’ll raise the tariffs on your milk. Let’s see how you like that!”
From that point on, tariffs keep getting hiked, and both countries are now locked in an escalating dispute. It’s just like your old playground tiffs, only with massive implications for the state of the global economy.
While trade wars are non-violent, that doesn’t mean they don’t do real damage. Industries in both countries will be negatively affected. Goods will sit unsold, profits will go down, and jobs will be lost.
And trade wars can turn into shooting wars, too. During the 1800’s, the first Opium War started as a trade dispute between the Chinese Quing Dynasty and Great Britain over the East India Company’s importing of (you guessed it) opium.
Are we in a trade war right now?
Starting in January 2018, the Trump administration and Chinese government (led by Communist Party general secretary Xi Jinping) have engaged in a classic trade war tit-for-tat.
Things have continued to escalate from there. Back in September, the U.S. announced new tariffs on $200 billion worth of Chinese goods with the promise of more tariffs if China retaliated—which they promptly did.
As of now, this trade war shows no signs of slowing down.
But do you really need to care about this?
Double oh yeah.
Economies thrive on stability and trade wars are the opposite of stable. The purpose of the multinational trade agreements and organizations like the World Trade Organization (WTO) are to avoid trade wars by instilling both rules and venues to settle individual disputes.
But the free flow of goods and services across borders isn’t without its downsides, especially for wealthy countries like the US. It can mean fewer well-paying blue collar jobs for U.S. residents, either because their companies aren’t able to compete or because they move their operations to lower-cost countries in order to stay competitive.
Then again, the decreased cost of foreign goods also means much lower prices for consumers, which boosts the U.S. economy overall. As we continue to stress, the forces at play here are extremely complicated and require reams of rigorous, sober-minded analysis to unpack, more so than we can provide in a simple blog post.
The word of the day is: uncertainty.
All that having been said, the short-term effects of this trade war are likely going to be lost jobs and higher prices. Even if you won’t be affected by the former, you will almost certainly feel the latter in one way or another.
But really it’s that instability, and the uncertainty that it breeds, that is the largest cause for concern. We can talk about the likely short-term effects, but it’s the complete unknowns that could be really harmful. Or they could be great! The problem is: we don’t know.
If it helps, think of our current trade war like it’s that creepy, psychedelic boat ride from Willy Wonka and the Chocolate Factory. As Gene Wilder himself puts it:
There’s no earthly way of knowing
Which direction we are going
There’s no knowing where we’re rowing
Or which way the river’s flowing
Sure, in that scenario, everything turns out fine in the end. Well, for Charlie at least. Not for the other kids. And as anyone who remembers watching that scene from between their fingers can tell you: things might get better, but they’re going to get a whole lot scarier first.
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