A trade war is when there is an economic conflict between a nation which imposes tariffs or quotas, creation of trade barriers on imports and foreign countries retaliate with related sorts of trade protectionism. As it intensifies, a trade war reduces international trade. Of late, there have been a number of high-profile trade discussions taking place.
Generally, a trade war has a direct impact on the export industry altogether. If there is a slight hike in the tariff of even 10% in the industry such as agriculture, automobiles and tech can affect the economy of exporting country. Holistically, a trade war has a direct impact on international business between two nations due to disagreement and differences, which leads to an indirect impact on other countries in the long run as well.
In a global economy, a trade war can lead havocking to the consumers and businesses of both nations and the effect can grow to affect many aspects of both economies. A trade war might proffer short-term advantages and much-needed growth to the domestic sector by boosting job creation.
The international trade policy is built on two main factors:
• Free Trade
Free trade is a trade policy that does not limit imports or exports; it is a free market implemented in international business. In government, free trade is primarily promoted by political parties that hold liberal positions while the left-wing and nationalist political parties commonly support protectionism.
Protectionism is the economic policy of restricting imports from other countries through practices such as tariffs on imported goods, import quotas, and a variety of other government regulations. Advocates insist and assume it boosts local businesses to flourish and thrive.
There is consent among economists that free trade, deregulation, and the lowering of trade barriers have a notably positive impact on economic growth which will promote robust international trade, while protectionism has an unfavourable effect on economic growth and prosperity. Some scholars have linked protectionism as the foundation of economic emergencies, most reputably the Great Depression.
In recent time, the world is observing a Trade War or a Trade War-like situation happening by the United States of America. America’s year-long trade war with China is forcing US companies to source more from the Generalised System of Preferences (GSP) countries such as India, Thailand, Cambodia, Indonesia and Turkey. Meantime, the US has decided to roll back export incentives and trade preferences provided under the GSP from India from June 5, 2019. This move is expected to hit India’s exports worth USD 5.6 billion under this agenda.
Another such scenario is in the case of Brexit. Whether it happens or not, although the UK and EU are opposed to a trade war, one could expect significant consequences for trade and policies if a trade war breaks out.
International trade creates equilibrium between scarcity and abundance of natural resources between any two countries. In a healthy economy and ecosphere, trade wars should be avoided allowing for a more effective utilisation of limited resources.