A trade war is more than just getting companies like Huawei banned. Initiating a trade war can cause withstanding impact and drastically change the economic terrain we’re navigating in.
For starters, what is a trade war? How are we affected exactly? It’s time to find out.
What is a trade war?
In essence, a trade war involves countries imposing tariffs (tax on imported goods) and quotas on each another’s goods. Typically, trade wars arise from trade protectionism, which are policies that attempt to protect its domestic industry, neutralize trade deficits, and create jobs.
How do trade wars affect us?
Trade protectionism is a solution which may work for a bit. Given the competitive advantage, local companies can offer products for lower prices, thus increasing their popularity with local consumers. This will lead to growth which then will lead to more job offerings.
However, a trade war is bound to be detrimental over time. There is an obvious increase in political tension due to the harm it costs to the economies involved. At the same time, economic growth is slowed down for the countries involved and inflation is triggered.
While protectionism may lead to the creation of jobs, it can also cause the loss of jobs. In the United States, 12 million workers work on export-related industries.
Who are most affected?
The ongoing US-China trade war badly affects both countries one way or another.
As for the United States, World Bank’s economist Pinelopi Goldberg and other proponents analyzed the effects of the current trade war in the country in their paper. They found out that US farmers and blue-collar workers — Trump’s strongest supporters — are actually the ones suffering the most.
For China, the insane increase in tariffs kicked exporters of substitutable goods out of the bucket, since US can easily import from other countries to avoid the tax.
Dr Meredith Crowley, a trade expert at the University of Cambridge, states that this may not be the case for those with highly differentiated goods. If US is heavily reliant on them, then the high tariffs may be overlooked without the Chinese exporters needing to adjust their prices.
Given that China exports more to the US than the US does to China, China is expected to suffer more. However, the US is far from sailing smoothly in this trade war.