Trade wars- Causes and Impact

Trade wars- Causes and Impact

 

What is a Trade war?

It is quite common that countries trade in goods between themselves.  When goods are imported by country X from country Y, X pays taxes for imported goods and services to Y.  Suppose if Y increases tariff for the goods imported by X, X to increases the tariff for the goods imported to Y.  This situation is called a trade war.  It is a serious economic conflict.  Only when both the nations involved work together to solve this, both the economies would be protected.

Reasons for trade war:

Following are the reasons for a trade war:

  1. If tariffs are increased, the imported goods become costly. In such a case, people will prefer locally manufactured goods instead of imported goods.  To boost up the sale of goods manufactured within a country, this tactic is adopted by the government.  Sometimes due to pressure exerted by local manufacturers/trade union the government is forced to take this decision.
  2. Trade misunderstandings between nations that the other country is engaged in unfair trade practices.
  3. Large trade deficit which the importing country is not able to settle.  To counter this situation the tariff is increased.  This will result in offsetting the trade deficit situation.

Sometimes in a trade situation decision are taken based on emotions, influence, and protectionism.  Such decisions may not be successful and cause discomforts to many.  That’s why technology has given us an automated trading robot to make correct decisions which are not prone to error.  These will create huge profits and happiness in the minds of all the investors.  But a trade war has some pros and cons.  Let us see them in detail

Pros:

  1. It protects the local industries.
  2. It results in increased employment and boosts up the economy.

Cons:

  1. Protectionism does not have a long-lasting effect. Instead, it results in slow-down of economic growth in the long run.  Over a period of time even local manufacturers tend to raise the prices.
  2. It affects the mutual relationship between nations.

How to handle this amicably:

A suitable decision has to be taken by nations to handle this situation in a diplomatic manner.  The following can be done:

  1. To set a cap on the imports. Most countries set a quota for total import of different domestic goods.  This will ensure that import trade is not affected (and) local products also sell reasonably well.
  2. Giving subsidies for local products manufacturers
  3. Setting clear standards for product quality