Question

Should governments intervene in trade? Have government interventions been positive or negative for trade? In your answer refer to the USA/China trade war as well as other examples where appropriate.

Answer 1

Trade wars are a side effect of protectionism, which are government actions and policies that restrict international trade. A country will generally undertake protectionist actions with the intent of shielding domestic businesses and jobs from foreign competition. Protectionism is also a method used to balance trade deficits. A trade deficit happens when a country's imports exceed the amounts of its exports. A tariff is a tax or duty imposed on the goods imported into a nation. In a global economy, a trade war can become very damaging to the consumers and businesses of both nations, and the contagion can grow to affect many aspects of both economies.

A trade war that begins in one sector can grow to affect other sectors. Likewise, a trade war that begins between two countries can affect other countries not initially involved in the trade war. As noted above, this import tit-for-tat battle can result from a protectionist penchant.

A trade war is distinct from other actions taken to control imports and exports, such as sanctions. Instead, the war has detrimental effects on the trading relationship between two countries in that its goals are related specifically to trade. Sanctions, for example, may also have philanthropic goals.

In addition to tariffs, protectionist policies can be implemented by placing a cap on import quotas, setting clear product standards, or implementing government subsidies for processes to deter outsourcing.

The Pros and Cons of a Trade War

The advantages and disadvantages of trade wars in particular, and protectionism in general, are the subjects of fierce and ongoing debate. Proponents of protectionism argue that well-crafted policies provide competitive advantages. By blocking or discouraging imports, protective policies throw more business toward the domestic producers, which ultimately creates more American employment. These policies also serve to overcome a trade deficit. Additionally, proponents believe that painful tariffs and trade wars may also be the only effective way to deal with a nation that continues to behave unfairly or unethically in its trading policies.

Pros

• Protects domestic companies from unfair competition

• Increases demand for domestic goods

• Promotes local job growth

• Improves trade deficits

• Punishes nation with unethical trade policies

Cons

• Increases costs and induces inflation

• Causes marketplace shortages, reduces choice

• Discourages trade

• Slows economic growth

• Hurts diplomatic relations, cultural exchange

Critics argue that protectionism often hurts the people it is intended to protect long-term by choking off markets and slowing economic growth and cultural exchange. Consumers may begin to have less choice in the marketplace. They may even face shortages if there is no ready domestic substitute for the imported goods that tariffs have impacted or eliminated. Having to pay more for raw materials hurts manufacturers' profit margins. As a result, trade wars can lead to price increases with manufactured goods, in particular, becoming more expensive sparking inflation in the local economy overall.

Example of a Trade War
While running for President in 2016, President Donald Trump expressed his disdain for many current trade agreements, promising to bring manufacturing jobs back to the United States from other nations where they have been outsourced, such as China and India. After his election, he embarked on a protectionist campaign. President Trump also threatened to pull the U.S. out of the World Trade Organization (WTO), an impartial, international entity that regulates and arbitrates trade among the 164 countries that belong to it.

In early 2018, President Trump stepped up his efforts, particularly against China, threatening a big fine over alleged intellectual property (IP) theft and significant tariffs on $500 billion worth of Chinese products such as steel and soy products. The Chinese retaliated with a 25% tax on over 100 U.S. products.

Throughout the year, the two nations continued to threaten each other, releasing lists of proposed tariffs on various goods. In September, the U.S. implemented 10% tariffs. Although China responded with tariffs of its own, the American duties did have an impact on the Chinese economy, hurting manufacturers and causing a slowdown. In December, each nation agreed to halt imposing any new taxes. The tariff war cease-fire continued into 2019. In the spring, China and the U.S. seemed on the verge of a trade agreement.

However, at the beginning of May, literally less than a week before final talks were slated to begin, Chinese officials took a new hard line in negotiations, refusing to make changes in their company-subsidizing laws and insisting on the lifting of the current tariffs. Angered by this apparent backtracking, the president doubled down, announcing May 5 that he was going to increase tariffs from 10% to 25% on $200 billion worth of Chinese imports, as of May 10. He may have felt emboldened by the fact that the U.S. trade deficit with China had fallen to its lowest level in 2014.

China halted all imports of farm products by state-owned firms in retaliation. The Asian nation's central bank also weakened the yuan above the seven per dollar reference rate for the first time in over a decade, leading to concerns about a currency war. Perhaps realizing that this was mutually destructive, U.S. and China agreed to a trade deal that was signed on January 15, 2020, but the subsequent COVID-19 pandemic is threatening further escalation of trade tensions between the two nations.

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