The History, Present and Future of Trade Wars

Trade Wars Introduction A trade war is an economic conflict that occurs when a country imposes tariffs and quotas that restrict imports, and in retaliation foreign countries also create trade barriers to deter the country from trading freely with them. Countries usually create tariffs to offset trade deficits, protect their domestic industries from excessive competition and also create employment.

This strategy is effective in the short run because it protects the local economy; but in today’s global economy, it is detrimental in the long run since a country needs to engage in international trade to grow. A trade war also increases the prices of imports thus causing inflation. Trade wars begin when a country perceives another country to have an unfair advantage over it that could affect its domestic economy if it is allowed to trade without restrictions. Trade wars that begin between two countries easily spread to other countries, and can also spread from one sector to other sectors.

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History of Trade Wars Trade wars have been a common occurrence among trading nations for centuries. In the 17th, 18th and 19th century, colonial powers fought each other to gain control of the resources of overseas colonies. In the 19th century, there was an intense trade war between the Chinese and British Empire because the emperor of China no longer wanted the British to export opium to China, thus declared it illegal. The trade war persisted until China finally conceded and allowed Britain to trade with the nation. In 1930, the United States imposed tariffs on European agricultural products in an effort to protect American farmers (Irwin, 2017).

However, these barriers were detrimental to the global economy because many nations retaliated with their own tariffs, causing their economies to shrink. President Roosevelt reduced these trade barriers through the North American Free Trade Agreement (NAFTA) to help ease the US out of the Great Depression.

The reemergence of Trade Wars in the World Economy Openness to trade with other countries and trade liberalization are crucial indicators of the well-being of a country’s economy. Since the middle of the 20th century, advancements in technology and transport infrastructure have accelerated the growth of international trade. The economies of several countries grew exponentially as trade barriers declined and cooperation grew. However, despite knowing the several adverse effects of trade wars, they continue to take place amongst some countries which consider protectionism measures to be one of the most effective ways of protecting their domestic industries from unfair competition and establishing dominance over each other. For instance, the two largest economies in the world, China and the United States, have been embroiled in trade disputes for several years, but it escalated to new heights in 2018 when the United States imposed heavy trade barriers on

China (LaRocco, 2019). The United States accused China of unfair trade practices such as intellectual property theft and transferring American technology to themselves forcefully. The United States-China trade war has been particularly detrimental to the US economy since consumers are forced to pay higher prices for commodities as a result of the additional tariffs imposed on Chinese imports. It has also affected exporters since they cannot trade freely with China, which previously was one of their main markets. This conflict is also detrimental to China's economy because the United States is the largest importer in the world and one of its greatest trade partners. In addition, the economies of several other countries are adversely affected, and this threatens to slow down global economic growth. The resolution of this conflict would, therefore, help to reduce global economic uncertainty.

Arguments / Counterarguments for Countries to Start Trade Wars Globalization has resulted in an economic system where countries rely on their trade with each other for economic sustainability. While countries should be open to trade cooperation with other countries, they should also ensure that their domestic industries are protected from intense competition from those of foreign countries. In recent years, there has been an increase in protectionism especially among industrialized countries which seek to protect their industries from the negative consequences of free trade.

Countries raise import tariffs with the expectation that it will make the cost of imported goods expensive for the domestic market, thus encourage them to consume locally manufactured products. This, ultimately, reduces the rate of unemployment. They also expected that reducing the number of imports will lead to a lower balance of payments deficit, hence a more favourable economic condition (Tandon, 2015). However, this does not usually occur as expected because when a country imposes strict tariffs and trade barriers on its trade partners,

they are likely to retaliate with punitive trade restrictions of their own. The balance of payment deficit does not reduce because as much as the country restricts foreign countries from trading with it, they also do the same, thus leading to a lower level of exports.

Additionally, citizens are forced to pay higher prices for imports and this raises the country’s inflation rate.

Free trade encourages specialization since it allows concentrating on producing the goods and services that it is good at, and importing what it does not have the resources to produce.

Imposing protectionist policies in the form of trade barriers and increasing import tariffs is detrimental to the economy because it reduces the incentive for specialization, forcing the country to have to reduce its level of specialization in order to produce goods that it could otherwise have imported. This usually results in economic restructuring which is often expensive and time-consuming. At the same time, the country's exports become less competitive in foreign countries due to the retaliatory tariffs imposed on them, hence it will earn lower revenues. In the short term, trade protectionism may have positive effects on a country's economy, but in the long run, it has adverse effects that are often challenging to reverse.

Arguments for Trade Protectionism Emerging economies such as India, Nigeria, Taiwan and South Africa have the potential to become major players in the international market but fail because their industries are highly exposed to competition from more developed foreign manufacturers. Engaging in trade wars can be beneficial for the country's infant industries because it gives them time to grow and develop expertise until they are strong enough to face competition (Klein, & Pettis, 2018).

India is one of the countries that has benefitted significantly from this strategy such that its

industries now have the potential to compete with some of the largest foreign industries in the world.

Opponents of the infant industry argument state that infant industries rarely mature because they become used to the protection they experienced in their initial stages. Once an industry is protected, it becomes increasingly challenging for it to operate in a turbulent global environment independently.

Trade wars are also important because they force the country to produce more of the products and services they need hence become more independent in the long run. This also increases the country’s financial stability because it leads to a higher level of diversification. Therefore, in case it is unable to export one commodity, it develops expertise in the production of other commodities thus has a wider variety of products to the trade.

The global economy is fast-paced and highly competitive and this means that industries are exposed to intense pressure, which might lead to their decline or collapse. The decline of an industry has a severe negative effect on the economy because it leads to mass unemployment.

Protectionism policies may, therefore, be important to a country's economy because they protect infant and declining industries from the pressure of competing with more-established international manufacturers. This helps to control the rate of unemployment and reduces the probability of the economy shrinking.

However, while employment opportunities might be created domestically in the short run, foreign countries might reduce their foreign direct investment in the country, and this can cause the country to lose out on increasing its employment rate by a greater margin. Trade wars also ensue as a response to unfair foreign competition. (Lau, 2018). In some cases, the export industries of foreign countries are heavily subsidized by their governments and this

makes it challenging for domestic industries to compete against their low-cost imports. This can affect an economy severely in cases where it exports low-value goods to the country and imports high-value goods. Trade wars, therefore, protect a country from exploitation by countries with unethical trade practices and also help to control trade deficits.

Similarities of Trade Wars There have been at least nine major trade wars in the history of the world, some more severe than others. One of the first trade wars to be recorded was the Anglo-Dutch wars, which were a series of wars between England and the Dutch Republic that occurred from 1652 to around 1784. During these years, the two countries were in conflict over who between them would control certain trade routes, colonies and resources. The wars were fought mostly at sea and were won by Great Britain. The second trade war was the Opium Wars which took place for approximately 20 years in the mid-19th century. The British government smuggled opium from India into China and would continue even when the trade was declared illegal. China lost the war and was forced to cede some of its territory to Hong Kong and the United Kingdom. The Banana Wars occurred from the end of the 19th century to the 1930s and their objective was to allow the United States to protect its trade interests in Central America and the Carribean. One of the main differences between the trade wars that took place before the 20th century and those that happened in the earlier centuries was the nature of the warfare.

Earlier trade wars often involved military involvement as countries physically fought to gain control of certain resources. The modern trade wars, however, are mostly fought through policies, laws and regulations (The New York Times Editorial Staff, 2018). In the earlier centuries, trade wars were mainly to establish dominion over resources; modern-day trade wars, on the other hand, seek to protect countries from unfair and intense competition from

other countries and to reduce trade deficits. The second major difference between trade wars of the past and the present ones was that previously, there was a distinct winner of a trade war. For instance, in the trade war between Great Britain and the Dutch Republic, Great Britain won because it gained control of the colonies.

However, in modern trade wars all countries involved in a trade war lose because, over the years, globalization has made countries' economies interdependent. As a result, in the event of a trade war, all countries involved experience less international trade. Trade wars, however, are similar in that they can only be resolved through dialogue and policy reforms. In the case of China and the United States, for instance, the only solution is to pursue policy reforms that would allow both nations to trade with each other under certain conditions, or for them to completely disengage from trading with each other. The second alternative is harmful not only to the economy of the two trade partners but also to the global economy. The trade wars of today are therefore significantly different because of the interdependence among countries; a recession in the economy of a developed nation ultimately causes a recession in other countries. The main similarity between all trade wars in history is that they are accelerated by the retaliations that ensue. A country rarely prohibits another form trading freely with it and the trade partner fails to respond with a similar or more amplified action.

Effects of Trade Wars Governments of some of the world's leading economies are increasingly adopting a conservative attitude towards the liberalization of international trade. This is well illustrated by the ongoing trade war between China and the United States, and also to a certain extent Brexit, where the United Kingdom sought to free itself from free trade with the European Union.

Between 1940 and 2010, the global economy grew exponentially because there was free trade amongst countries. The GDP of developed nations multiplied, industries grew and there were plenty of employment opportunities for the majority of the citizens. Trade wars have the potential of reversing the gains that were achieved during the decades of free trade.

Trade wars disrupt the global economy because they reduce the production levels of industries, and even lead to job losses in some sectors. Countries need to realize that globalization has made it impossible for countries to operate in isolation, and excessive trade protectionism only hurts the domestic economies (Xing, 2014). Trade restrictions have a farreaching effect because they not only affect the warring countries but also the countries that are involved in the supply chain. Additionally, trade tensions between countries affect global economic growth because they affect their ability to cohesively find solutions to global issues such as achieving global peace, food security and reducing poverty and inequality (Zeng, & Ka, 2010).

However, trade wars between two countries can sometimes work to the advantage of other countries. When countries that rely on each other for certain goods and services are in conflict, they are forced to trade with other countries, thus allowing these countries to increase the scale of their domestic industries as well as reduce their unemployment rates. For instance, in the trade dispute between the United States and China, the European Union is the greatest winner since it produces some of the commodities that the two nations need from each other (Ksah, 2019).

Countries must be cautious about engaging in trade wars because they often have a more farreaching effect than what was previously anticipated. When a country imposes trade restrictions on another country, there is always the risk that the other country, and others, will

also impose equally or more harsh retaliation measures. This places the country’s economy in a vulnerable position. If more countries engage in trade wars, it might lead to a global economic recession.

Conclusion Several countries are in dispute over whether free trade is beneficial to their economies, and whether they should adopt protectionist measures to protect their industries from excessive or unfair competition from other countries. As countries’ support for free trade continues to shrink, the possibility of trade wars should be a major concern for them because it leads to severe negative consequences for the countries involved, and there is also a high likelihood of it affecting the global economy. In order to reduce public support for trade protectionism, it is important to counter the public's notion that there are parties that benefit and others that lose.

Trade wars produce winners only in the short-term; in the long-run, there are several losers and the damage to their economies could be permanent. In the event that there is a trade dispute between significant trade partners, such as between the United States and China, the governments involved should work to amicably resolve the crisis through developing the right policies and economic structures, as well as through making compromises where necessary.

Trade wars have far-reaching negative effects, and can easily disrupt economies. It is therefore short-sighted for countries to fail to resolve their trade wars.

References Irwin, D.A. (2017). Peddling Protectionism: Smoot-Hawley and the Great Depression.

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Klein, M. C. & Pettis, M. (2018). Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace. Yale University Press.

Ksah, A. (2019). Trade War: Future War Looming Between The US And China And The Effects On The Modern World. Amazon Digital Services LLC. LaRocco, L. A. (2019). Trade War: Containers Don't Lie, Navigating the Bluster. Marine Money International.

Lau, L. J. (2018). The China-U.S. Trade War and Future Economic Relations. The Chinese University Press.

Tandon, Y. (2015). Trade Is War: The West's War Against the World. OR Books.

The New York Times Editorial Staff. (2018). Trade Wars: Tariffs in the 21st Century: Looking Forward. The Rosen Publishing Group, Inc. Xing, L. (2014). Behind the Multilateral Trading System. Carolina Academic Press.

Zeng, K. & Ka, Z. (2010). Trade Threats, Trade Wars: Bargaining, Retaliation, and American Coercive Diplomacy. University of Michigan Press.