When we are living in a globalized world, there is a need to maintain cordial trade relations between the communities of nations. The objective should be to create situations that are favourable to all the concerned parties. While this is the ideal situation, there are many countries that cannot agree on their ratio of imports and exports. This leads to trade tariffs and a trade war begins.
What is Trade Wars all About?
A trade war is a situation when some countries impose import restrictions by way of quotas or by increasing import duties. This leads to retaliation by the impacted country and this when done amongst a host of nations, contracts, and damages international trade. Trade wars are often used to protect domestic industries and also for creating jobs. However, these are at best short-term solutions. In the long term, it causes damage to economic growth for all. Reduction of imports could also lead to inflation in some countries and this could have a cascading impact.
What is a Tariff?
A tariff is a form of tax imposed on exported or imported goods. The taxes could be collected in the form of customs duties and the money so collected could be used to protect domestic industries from the influx of cheap goods made by competitors. This again is a short-term solution because the domestic customers are made to pay a higher price just to protect some jobs and domestic industries. There are basically two types of tariffs that are used and they are as follows:
- Ad Valorem tariffs are usually fixed tariffs charged on imported goods. As and when the price increases and falls the tariff amount also changes.
- On the other hand, some nations levy fixed tariffs which remain the same irrespective of price changes. This is basically a certain amount of money that does not change.
When such tariffs are imposed it certainly leads to conflict between countries. The countries whose exports are impacted by such tariffs are not likely to sit silently and watch the fun from the sidelines. They certainly would like to retaliate and this will lead to tit-for-tat tariffs and import restrictions.
(Guide) How does it Impact Global Trade
Experience and past trade wars and tariff wars have proven that it goes a long way in impacting global supply chains very badly. It pushes costs for businesses and also for consumers. It creates an artificial scarcity when there is actually none. It also impacts global stock markets. The stock markets and forex markets have always been volatile because of impending trade wars between major countries like the USA and China. As late as July 2018, the USA imposed some hefty trade tariffs on Chinese imports and this led to a loss of export to China equaling $38 billion. This is just the beginning and there are fears that should China retaliate it could become a full-blown trade war between the two countries. The signals and statements emanating from the leaders of these two powerful economies are not soothing, to say the least. President Trump has come out with a statement that he is ready to impose additional trade tariffs to the tune of $500 billion. If this happens Chinese economy will certainly take a beating and China is bound to retaliate very aggressively. The USA has to understand that if the Chinese economy is impacted even slightly by such anti-dumping duties and tariffs, it will have a negative impact on the USA also. The exports to China from the USA will take a huge beating and this will lead to unemployment and layoffs in the country. So, President Trump will have their cup of woes overflowing should this happen and the same will be the case for the Chinese President.
It will Grow Beyond China & USA
It would be nave to expect that this will remain restricted only between USA and China. It certainly will spill over and engulf other countries too. It would be pertinent to mention here that The European Union is ready to impose import tariffs to the tune of around $300 billion on US exports if President Trump imposes tariffs on imports of automobiles from across the globe. If this happens while the EU will suffer, the USA will suffer even more.
The Final Word:
In Fine, it would be pertinent to mention that such import tariffs and trade wars are very myopic ways of handling trade disputes. A better way would be to sit down with all stakeholders and find a middle path in the spirit of giving and taking. Unless this happens, such unintelligent decisions would cause immense damage to the entire world trade and the world economy and no one will be spared from it.