Reviewed by Sep 30, 2020| Updated on
A trade war occurs when one country counters another by raising import tariffs or putting restrictions on the other country's imports. A tariff refers to tax or duty imposed on the imported goods by a nation.
A trade war can hurt the consumer sentiments and businesses of both countries, negatively affecting several aspects of both economies. On the other hand, several advocates claim that trade wars protect national interests and are advantageous to domestic businesses.
Trade wars are by-products of protectionism, usually the government actions and policies that hinder international trade. A country may go for protectionist measures for the purpose of shielding domestic trades and jobs from foreign competition.
Protectionism also refers to a way of balancing trade deficits. A trade deficit occurs when the imports made by a country exceed the amounts of its exports.
Trade wars originate if one country contemplates its competitor nation to have unfair trading practices. Trade unions or industry lobbyists within the country may pressurise the politicians to make imported goods less attractive to consumers. It leads to pushing of international policy towards a trade war. Moreover, trade wars result from the differences in the widespread benefits of free trade.
A trade war that commences in one sector can grow to hit other sectors. Similarly, a trade war that starts between the two countries can affect other countries not involved initially in the trade war.
A trade war is different from other actions taken to control imports and exports, such as sanctions. Instead, the war has harmful effects on the trading relationship between two countries, such that its goals are explicitly associated with trading.
For example, sanctions may also have humanitarian goals. Apart from tariffs, protectionist policies can be executed by capping the import quotas, defining clear product standards, or implementing government subsidies for methods to deter outsourcing.