How Would a Trade War Affect You?

How Would a Trade War Affect You?

On Friday, July 6th, 2018 at exactly 12:01 am, the U.S. fired the first shots in a war. No missiles were used. Nor were drones or U.S. Marines involved. Instead, these shots were billions of dollars worth of tariffs aimed at the Chinese economy. This was a trade war. One that continues and could become the largest in world history.

In this article, we take a look at what trade wars can mean for the disputing countries, businesses, and consumers.

Key Takeaways

  • A trade war happens when countries take protectionist actions against each other as a result of barriers to trade.
  • Advocates say trade wars protect national interests and provide advantages to domestic businesses.
  • Critics of trade wars claim that they ultimately hurt local companies, consumers, and the economy.
  • In response to U.S. tariffs, China imposed its own tariffs on U.S. imports to China of pork, soybeans, and sorghum.
  • The trade war launched in 2018 between America and China continues even though it’s believed that some tariffs imposed on China have damaged U.S. interests.

The Basics of Trade Wars

The term trade war is used to describe an economic conflict where, in response to protectionism, countries impose trade barriers such as tariffs, restrictions, and quotas against each other.

Basically, one country imposes targeted tariffs on another’s economy in order to protect its own economy, or to hurt that of its adversary. The former may believe that the trading practices of the latter are unfair.

Example of a Trade War

Let’s say Country A and Country B both manufacture rubber chickens. County B then starts to subsidize its rubber chicken manufacturing. That means that the government of Country B is paying part of the cost of manufacturing, thus reducing the price for consumers.

Now, Country A is upset, because no one is going to buy rubber chickens from it if they’re cheaper to buy from Country B. So, Country A has two options. It can negotiate with Country B or impose tariffs on imported rubber chickens. The tariffs would raise the cost of Country B’s rubber chickens, punishing Country B.

If Country B wants to continue exporting to Country A, it has to pay a higher tax on its exported rubber chickens. Then Country B would most likely hit back with its own tariffs. This tariff back-and-forth is considered a trade war.

Countries get into conflicts over trade frequently. To sort them out, they can approach the World Trade Organization (WTO) for arbitration and a decision over which is at fault. They can negotiate a deal directly with each other. However, another option— that chosen by the Trump administration—is to impose unilateral tariffs on its opponent’s goods in the hope that they will buckle.

The U.S. trade war with Japan in the 1980s was meant to correct the trade imbalance involving electronics. President Reagan imposed 100% tariffs on products made by major Japanese manufacturers to punish Japan for breaching its trade agreement.

How Did the Trade War Play Out?

America’s Action

On Friday, July 6, 2018, the Trump administration imposed sweeping tariffs on $34 billion worth of Chinese goods. The tariffs targeted a wide variety of manufactured tech products, from flat-screen televisions, aircraft parts, and medical devices to nuclear reactor parts and self-propelled machinery.

While it was believed that most Americans would feel no effects of these tariffs—parents wouldn’t be shopping for aircraft parts— the Chinese economy would certainly suffer. The U.S. tariffs specifically targeted high-tech Chinese goods to hurt the Made in China 2025 initiative which sought to transform China into an advanced manufacturing powerhouse.

President Trump pushed further, warning that the U.S. could ultimately target over $500 billion worth of Chinese goods. In 2021, the U.S. imported $506.4 billion worth of goods from China.

China’s Response

In response to these new tariffs, China imposed its own. It targeted American agricultural products like pork (which added an estimated $57 billion, directly and indirectly, to the U.S. GDP in 2021), soybeans, and sorghum.

Caught in the crosshairs were American farmers and big industrial-agriculture operations in the Midwest. These are constituencies that largely voted for Donald Trump in 2016. China sought to affect these politically powerful groups of Americans directly and dramatically. As the 2018 midterm elections approached, perhaps they’d pressure President Trump to lower the barriers. 

As of Sep. 2, 2022, President Biden has maintained the tariffs with China. The Biden administration stated that it will review the tariffs.

Why China? 

Intellectual Property Theft

So, why was China hit with tariffs? The first reason points to growing concerns about Chinese economic espionage. The largest set of tariffs from the Trump administration came out of a federal investigation into Chinese intellectual property misdeeds.

The Trump administration designed the tariffs to punish China for trading access to the Chinese market for foreign tech plans. While those concerns were valid, they existed under President Bush and President Obama. Both presidents refrained from imposing tariffs of the magnitude seen in 2018.

The Trade Deficit

The second reason concerned the U.S. trade deficit with China. According to data released by the Commerce Department, the gap between American goods exported to China and Chinese goods imported to the U.S. rose to $355.3 billion in 2021 from $310.8 billion in 2020.

The Trump administration had been promising to eliminate the trade gap. It blamed the imbalance on the decline of American manufacturing and a reliance on foreign goods. With these newest tariffs in place, the Trump administration hoped to reverse the growth of our trade deficit and punish China for its trading practices.

What’s the Impact on American Consumers?

Effect of Tariffs

The effect of tariffs can be felt beyond the borders of the targeted country.

It’s important to understand that U.S.-China trade does not take place in a vacuum. Trade is part of a global economy. Different countries can be involved in the making and selling of goods before they reach their final destinations.

When the U.S. put tariffs on China, the world’s largest manufacturing hub, it likely affected other countries, products, and companies that are part of the global supply chain.

In our global, interconnected economy, it is nearly impossible to target one country (or one industry) without affecting others, including allies.

Potential Threat to Consumers

These tariffs had the potential to hurt American companies and consumers even more than the firms in China targeted by the Trump administration. A study by the Federal Reserve Bank of San Francisco in 2011 showed that for every dollar spent on an item labeled Made in China, 55 cents went to services produced in the United States. This is yet another example of how raising tariffs and starting trade wars in a global economy might come back to hurt U.S. businesses and consumers.

American consumers may have felt the consequences of Trump’s trade war with China. When companies have to make up for higher costs due to new tariffs, they shift that burden onto consumers. It takes time for these higher business costs to filter down to stores. It is likely that some prices have gone up and more will do the same.

What’s a Trade War?

A trade war is an economic battle that countries wage on one another to address protectionist policies seen as barriers to trade. Trade wars involve imposing various economic restrictions, such as tariffs and embargoes.

What Is a Trade Deficit?

A trade deficit is the imbalance between how much a country takes in for its exports and how much it spends on imports. If imports exceed exports, the country has a trade deficit. If exports exceed imports, the country has a trade surplus.

Why Are Tariffs Necessary?

There are various viewpoints regarding the need for tariffs. However, when diplomatic efforts related to trade (and other unfortunate behavior such as theft of business secrets or intellectual property) fail to resolve adversarial positions, tariffs and other punitive actions are sometimes the next step.

The Bottom Line

Trade wars are economic battles between countries that seek redress for wrongful economic actions that pose a threat to a country’s economic well-being. Tariffs can be part of those battles.

However, in imposing tariffs, governments should bear in mind that more than the target country may suffer. Economies operate on a global scale. Economic policies designed to punish one country can have a trickle-down effect on other nations and their consumers. In fact, the tariffs imposed on China by the U.S. in 2018 are believed to have damaged U.S. businesses and consumers without accomplishing the hoped for goal of reducing the trade deficit.