The conflict between two or more countries regarding tariffs or trade barriers against each other is called trade war. Usually, the country putting tariffs or barriers on trade is trying to improve exports or imports for its own nation. They have the potential to increase the price of certain imports if the nation refuses to make a compromise. However, there could be some adverse effects associated with trade wars too. By taking the example of US-China trade war let’s understand how it affects a country adversely.
- On may 10th the US hiked tariffs from 10% to 25% on Chinese goods that are worth $200 billion. Trump threatened to impose the same tariff on all imports of Chinese goods. In response, China imposed tariffs on $60 billion worth of US exports.
- Since China has moved to a market-based exchange-rate system, America should not be raising tariffs. Isolating it would be impossible since China is globally connected.
- America is likely to suffer due to higher tariffs. Commentators argue that American households will have to bear the brunt of the costs through higher cost and lower consumptions. Increase in price will be noticed on certain clothing items and shoes. In 2018, about 69% of all shoes sold in the US came from China. If China retaliates to the tariffs imposed by the US, by 2020 the US’s GDP growth will fall by 0.5%.
- A long-term tariff war will bring long-term consequences for the economy of the US because a large share of the US imports from China is production inputs. Increase in tariff will make inputs more expensive or scarcer. All these would hurt the US productivity, competitiveness and take a deep bite of the economy’s growth.
- For example, in 2018 the US imported clothing of worth $29.8 billion from China and leather of worth $20 billion. Increase rate of tariffs on these products would hit the American consumers. If tariffs remain high on these goods, the US production would be outcompeted by other countries just like it was outcompeted by Japan after the 1980s.
Tariffs are usually imposed to protect domestic producers from imported products. These not only will lead to higher prices but also will hurt the very domestic producers who the nation intended to protect. With no competition in the market, the domestic producers are left with very little space to improve their products.