TRADE WAR

INTRODUCTION

A trade war refers to two or more states raising or

creating tariffs or other trade barriers on each other in
retaliation for other trade barriers. Increased protection
causes both nations' output compositions to move
towards their autarky position.

Some economists[who?] agree that certain economic

protections are more costly than others, because they
may be more likely to trigger a trade war. For example, if
a country were to raise tariffs, then a second country in
retaliation may similarly raise tariffs. An increase
in subsidies, however, may be difficult to retaliate against by a
foreign country. Many poor countries do not have the ability to raise subsidies. In addition, poor
countries are more vulnerable than rich countries in trade wars; in raising protections
against dumping of cheap products, a government risks making the product too expensive for its
people to afford

The world's two biggest economies are locked in a trade tit-for-tat.China and the United
States have announced tariffs on more than $100 billion of combined goods.The latest
salvo came Wednesday, when the Chinese government proposed new tariffs on dozens
of US products including airplanes, cars and soybeans.
But the impending trade war between the Trump administration and China has been
building up for almost a year.

EFFECT OF THE TRADE WAR

Economic acrimony has been bubbling between the US and China since Donald Trump
became president. Now the tensions have boiled over into escalating tit-for-tat
announcements of tariffs on key imports. This is serious not just for the US and China,
but for the entire global economy and the UK, in particular, as it hopes for a free trade
Brexit. As Christine Lagarde, the International Monetary Fund director, has warned: the
world trade order “is now in danger of being torn apart”.

Anyone familiar with Trump’s zero sum approach to international trade won’t be
surprised by the turmoil. Although few might have predicted a US president assailing
the free trade model, while the Communist leader of China rides to its defence. Trump
made much of trade and the US external deficit on the campaign trail. Among his first
acts was to pull out of trade negotiations with Europe and with Asia. He has also
threatened to pull the US out of NAFTA and criticised the World Trade Organisation.

As seen on the stage of the hit musical Hamilton, arguments between protectionists and
free traders have a long history in US politics. The rise of China and other emerging
economies poses huge challenges for the US and other developed economies, with
uneven patterns of economic winners and losers within them.
Trump’s response reflects concerns over both the lost manufacturing industries of the
US rust belt, and the future – a perception that China’s trade practices are “unfair” and
threaten the US’s advantage in higher technology sectors. Much of the focus has been
Trump’s tariffs on steel and other heavy industrial goods. But the US tariffs also target a
range of high tech industries, particularly in those areas where the Chinese plan to
become world leaders over the next decade.

As critics have noted, these tariffs will not bring manufacturing jobs back. Any jobs
created in protected industries by tariffs would be more than offset by those lost in
industries that use these products facing rising costs and export sectors hit by China’s
retaliatory tariffs.

Complex international networks

The US cannot solve trade deficits bilaterally, particularly with China, where trade
relations are particularly complex as US companies have moved their production to
China. In practice, the US deficit with China has fallen and China’s barriers to
imports have been reduced. Modern industrial production takes place within complex
international networks and protection is not going to bring whole industries back to the
US.

These developments should be seen in context. Before the 2007-08 financial crisis,
global trade consistently grew faster than GDP. Since then, global trade has been weak.

So far, policymakers have avoided the sort of protectionist response seen in the 1930s
Great Depression, but the global trading system itself has been eroded, with piecemeal
protectionist measures on the rise since the financial crisis.

The principle that trade is mutually beneficial for countries has always been mixed with
national political calculation in negotiations. Lately, the US has sought to use trade
negotiations to try to please its electorate.

Not boding well for Brexit

So far, the threatened measures by the US and countermeasures by China remain
relatively limited and this may be largely a case of initial bargaining positions. But if
things develop, it will have wider effects on the global economy. The UK, with Brexit on
the horizon, could be particularly hit by this.

Britain is a relatively open economy and has bet a lot on an open global trade order.
Any significant erosion of a rules-based world trade system would therefore threaten
British prosperity. Even if these developments fall short of a full-scale trade war, a shift
to a more fragmented and protectionist world order would compound the challenges
facing the UK, independent of the EU.
Britain has a particular advantage in services – an area of trade where global
barriers remain relatively high. This does mean that there is considerable potential to
expand this trade. But global negotiations to liberalise services trade through the
WTO have effectively been stuck for years.

Negotiations for some form of preferential trading arrangement between the UK and the
EU after Brexit have concentrated on trade in goods rather than services. Further,
currently Britain is party to preferential trading arrangements the EU has agreed with
around 50 other partners.

There has been a lot of talk about a lucrative US-UK trade deal. But, realistically, Britain
would be negotiating with a much larger partner from a position where the UK currently
runs a surplus. The US is the world’s leading services exporter and is clearly using
trade negotiations to entrench its competitive advantage. Any negotiations with the US
would therefore likely be tough.

Trade negotiations have become increasingly complex, particularly in services, focusing

on harmonising standards and regulations rather than just reducing tariffs. The
implications may be controversial. There has already been much discussion of
“chlorinated chicken” and hormone-treated beef as likely conditions for a trade deal with
the US. Opening up trade in services may also lead to public services like the NHS
facing competition from private providers.

A medium-sized country like the UK is likely to find it harder to negotiate favourable

trade deals in a fragmenting world trade order at just the time when its government is
betting on being able to negotiate deals with countries beyond the EU and expand its
trade with these countries.