Trade Wars for Dummies

Widespread fear of a global recession is intensely churning amongst investors, corporate executives, economists, and shareholders. Although some experts and political figures, such as US President Donald Trump himself, claim that a recession is not bound to happen at least until 2021, financial pundits who believe a recession is imminent have analyzed various factors and causes of a potential recession in order to accurately predict the time of arrival. It turns out that the predictions differ slightly, yet they have unanimously agreed upon one crucial factor behind the cause of an upcoming recession: trade wars.

South Korea’s recent semi-conductor trade tension with Japan.

The “biggest trade war in economic history” (as described by the Chinese Ministry of Commerce) between the two global superpowers, USA and China.

Whether you read the world news on a daily basis or not, you might’ve heard about these issues from your parents, peers, social media, or your economics teacher––especially for those of you enrolled in Mr. Cheung’s IB Economics class and have your “adopted country” as USA, China, Japan, or South Korea. Then, the main question is: why is this trade war such a big issue? Why does it even matter? If you cannot think of an answer to these questions on top of your head, welcome aboard––you have chosen the perfect article. 

How do trade wars begin? 

To understand trade wars in general, knowing how they start in the first place would be the first step. The root of all trade wars fundamentally lies upon trade protectionism: a policy by which a nation imposes trade barriers, such as tariffs, import quotas, government subsidies, and product standards, to support local industries.

Then you might ask how does raising trade barriers support local industries? Let’s say China imports iPhones from the US for $700. Introduction of these iPhones leads to more competition for Chinese smartphone companies such as Huawei, Xiaomi, and Oppo. To protect the sales of these domestic firms, China will raise trade barriers and make the price of iPhones higher at $800 (in this hypothetical scenario). Hence, this is the reason why MacBooks and a pair of Nikes sell cheaper in US retail shops as compared to those in China. It is safe to say that almost all countries practice some form of trade protectionism with varying degrees to protect their local businesses from foreign competitors. 

However, in some occasions, a country may believe they are placed at a disadvantageous situation during trade––that is, they think they are losing more than what they are gaining (In economics, you call this having a worse trade balance). Therefore, this country (let’s call it Country A) will set up or strengthen its protectionist policies against Country B. Here, if Country B retaliates against Country A with its own kind of trade protectionism, then this is the moment when a “trade war” ignites––given that the two continue to retaliate against each other with tit-for-tat attacking measures. This happened between China and the US, and as we all know, their trade war which began in mid-2018 still seems to have no end, unfortunately.

Are there any other famous historical examples of trade wars?

Many people already know about the US-China trade war, and usually, this happens to be the only example that people know because trade wars were never so widely discussed in our modern history. Well, here are a few notable examples of trade wars that have occurred during the past century: 

-The Opium War between China and Great Britain: This began when China completely banned the import of British opium––a form of extreme trade protectionism known as a trade embargo. Enraged, the British Empire invaded China, which ended with China being forced to open all its harbors and hand over Hong Kong Islands to the British. 

-Smoot-Hawley Tariff Act of 1930: In the wake of the Great Depression, US President Herbert Hoover signed the Smoot-Hawley Tariff Act with the intention of protecting US farmers and stock markets. The Act imposed tariffs on about 20,000 imported products from a variety of sectors, and in doing so, successfully decreased the US’s dependence on imports. However, the retaliatory tariffs by other countries caused a 61% decrease in US exports which severely worsened the Great Depression in the US (source).

So what? Why does this matter? 

Irrespective of its duration or scale, a trade war can leave a devastating impact, not only on those nations actually engaged in the war themselves but also on the entire landscape of the global economy. On a macro-level, trade wars may bring negative consequences such as political instability, an increase in the average price levels, and a decrease in business revenue, which can all ultimately contribute to an economic slowdown. If these outcomes intensify through prolongation of the war, it may indirectly lead to even worse consequences such as unemployment or stagflation (where inflation and recession happen simultaneously).

As of now, the topic of trade wars may still be rather difficult to understand. You may still think trade wars don’t really have anything to do with you. After all, how would an intangible government-to-government, money-related “war” have anything to do with our current lives at AISG? I myself did not really understand the impact of trade wars either until I had to write a 5000+ words chair report about trade wars for Model United Nations (MUN) over the summer. To put it simply, you might’ve read from local news that the base prices of all iPhones in China will increase starting from December. You might’ve also read about China’s recent devaluation of their renminbi, which has fallen below the psychologically significant value of “7”. Yet, the disturbing truth is that these lingering effects from the US-China trade war represent only a small tip of the iceberg. As we currently live in China, you might realize––sooner or later––that almost all imported goods and domestic goods have increased in their prices, that the exchange rate between RMB and USD has fallen, and that social unrest still looms over many workers and corporate executives in China.

For more information, please visit Financial Times, Britannica, and Livemint.com.