Trade wars, explained – Vox

The “weapons” in a trade war are everywhere. It’s the food you eat, the train you ride to work, and the screen you’re reading this on. “As a consumer, you’re probably consuming imports,” explained Phil Levy, senior fellow on the global economy at the Chicago Council on Global Affairs. “If we have a trade war and we start slapping tariffs on all of those imports, the bill is going to be higher.”

If we rely so much on trade, what is a trade war, and why do countries get caught up in them in the first place?

To understand what a trade war is, imagine country X and country Y manufacture tires. Country Y then starts to subsidize tire manufacturing. That basically means the government of country Y is paying at least part of the cost of manufacturing, reducing the price for buyers. Country X is understandably upset — why would anyone want to buy their more expensive product?

They could try to negotiate with country Y. Or they could choose to impose tariffs, taxes on imports that raise the cost of those goods, which in this case would punish country Y. With the tariffs in place, if country Y tried to export goods to country X, it would have to pay an extra tax. Country Y could then hit back with tariffs of its own. If this disagreement goes back and forth and escalates with even more tariffs, it would be considered a trade war.

In this example, a trade war began over unfair trade practices. But there’s more than one way a trade war can start. “One possibility is you want to keep out countries import so that your domestic competitors have an advantage,” said Levy. “Second possibility is if there’s a country that is doing something that you don’t want, then you can use a tariff as a way of inflicting a degree of economic pain on that country. And you say, ‘Until you change your evil ways, I’m going to make it hurt.’”

So who “wins” a trade war? “One way to think about who ‘wins’ a trade war is looking at which country has more targets to choose from,” Vox’s Zeeshan Aleem said. “The more goods you ship to another country, the more vulnerable your goods are to punishing tariffs. So some economists would say that the country which ships fewer goods to the other has an advantage — and can outlast the other in an extended clash.”

Trade wars can also boost the fortunes of countries that stand outside the fray. In the 1930s, the US enacted the Smoot-Hawley Tariff Act, which put in place steep, sweeping tariffs on imports as a way to protect American workers and industries. Canada and some European countries put up tariffs of their own, launching a trade war. Some of these countries abandoned the US as a trading ally and took their trading elsewhere.

Soviet Russia, a country not involved in the trade war, ended up gaining trading partners as a result of Smoot-Hawley. But, as is the case with most wars, trade wars are harmful for everyone involved — particularly poorer consumers.

“Traditionally when you looked at trade protection, you put your protection on goods that are consumed by poor people,” Levy told me. “There are economists who have documented that, systematically, you tend to find higher tariffs on things like woolen clothing, shoes, sugar, other things which play a disproportionate role in the spending of people who are less well-off.”

In April, President Trump unveiled a list of more than 1,000 Chinese exports — things like aircraft parts, TVs, and medical devices — that he planned to place tariffs on, as a way to punish Beijing for restricting US investment in China and stealing American intellectual property. The very next day, China struck back, unveiling its own list of US exports that it planned to place tariffs on. Since then, Trump has threatened another round of tariffs, with China ready to respond in kind. The whole situation is starting to look a lot like a trade war.

“Countries disagree on fair and unfair trade practices all the time,” Aleem explained. “But there’s something unique about Trump’s approach to it: the unpredictability, the wild threats, the disinterest in even pretending to play by the rules. Trump isn’t just destabilizing trade relations with China or any other country he threatens — he’s destabilizing the global system of trade.”

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