Trade wars can begin a number of ways. When imports from one country begin to supplant another country’s domestic production, a government can come under pressure from its industry and labor groups to protect them from the foreign competition. The reasons can vary. Sometimes it is justified, due to the unfair trade practices by another nation. Or a country may have a severe balance of payments deficit with other countries and must restrict imports in order to avoid national insolvency. But often, protectionism is the result of one side’s desire to benefit at the expense of another. Greed can be a big motivator, both for businessmen and for politicians.
WHAT ARE THE WEAPONS IN A TRADE WAR?
One of the simplest ways countries restrict imports from other countries is to place tariffs—a kind of tax—on imports from other nations. Tariffs make the imports more expensive and reduce the demand for the foreign products. This makes the products produced within the country more competitive and profitable—and, regrettably, more expensive for consumers.
Another weapon is regulation. A country can add regulatory requirements to imports that raise their prices or prevent their import altogether.
Sometimes a country will engage in currency manipulation to make its exports more attractive and imports less attractive. President Donald Trump has accused China of debasing the value of the Chinese yuan to make its exports more competitive to foreign markets, particularly that of the U.S. China, of course, denies the charge, and a former commerce minister of China said in early March 2017, “I’m seriously preparing for a trade war” (“Are U.S. and China Headed for ‘Hot War’ over Trade?”, Wall Street Journal, March 8, 2017). This is worrisome talk between great nations—in its own way, just one more “rumor of war” in our own headlines.
Another common weapon in trade wars is the use of import quotas, in which a country puts a quota on the amount of certain products that can be imported from another country. For instance, the U.S. has quotas on the amount of sugar that can be imported, and it provides sugar producers in the U.S. significant protection from low-cost foreign competition. However, the quotas increase sugar prices for U.S. consumers.
Government subsidies can be a weapon in trade relations, because subsidized industries in one country can dump their products at below cost in another country, thereby creating an unfair trade advantage.
To a degree, some trade barriers are commonly accepted among countries, and they do not necessarily result in retaliation leading to trade war.