A trade war is when a nation imposes tariffs or quotas on imports and foreign countries retaliate with similar forms of trade protectionism. As it escalates, a trade war reduces international trade.
A trade war starts when a nation attempts to protect a domestic industry and create jobs. In the short run, it may work. But in the long run, a trade war costs jobs and depresses economic growth for all countries involved. It also triggers inflation when tariffs increase the prices of imports.
The last major trade war occurred with the 1930 Smoot-Hawley Tariff. It increased 900 import tariffs by an average of 40 to 48 percent. Its purpose was to support U.S. farmers who had been ravaged by the Dust Bowl. But it also raised food prices for Americans who were already suffering from the Great Depression. Other countries retaliated with their own tariffs. It forced global trade down by 65 percent, worsened the depression, and contributed to the start of World War II.
Trump's Trade War
On March 8, 2018, President Trump announced a 25 percent tariff on steel imports and a 10 percent tariff on aluminum. Trump said, "Trade wars are good, and easy to win." But the markets disagreed. Stock markets around the world tumbled in fear of a trade war between the world's three largest economies.
The U.S. Congress is the only body authorized to impose tariffs. But Trump used a special power granted by Congress in 1962. It allows a president to curb imports that threaten national security. The Commerce Department reported that dependence on imported metals threatens the U.S. ability to make weapons. But the Aerospace Industry Council said Trump's tariffs would instead raise costs for the military and exporters.
Eight countries have filed formal complaints with the World Trade Organization. Many of these countries, like Canada, India, and the EU, are allies. They say Trump cannot justify the tariffs on the basis of national security. The other five complainants are Mexico, Norway, Switzerland, China, and Russia.
America is the world's largest steel importer. Trump believes the tariffs would protect the 147,000 workers in the U.S. steel and aluminum industries. But they could hurt the 6.5 million workers in U.S. industries that import steel.
A trade war raises costs for steel users, like automakers. Tariffs lowered second-quarter profits for the big three automakers. To satisfy shareholders, they may have to pass those costs onto consumers. Costs have already outweighed the benefits of Trump's tax plan.
The tariff is in effect against China, Japan, and Russia. Japan's trade minister said, "I believe there is absolutely no impact on America's national security from imports of steel and aluminum from Japan, which is an allied nation."
On March 26, 2018, Trump exempted South Korea from the steel tariff. The U.S. ally is the third largest foreign supplier of steel. In return, South Korea agreed to amend the 2012 bilateral trade agreement. The United States will keep its 25 percent tariff on pickup trucks for an additional 20 years. Under the original agreement, the tariffs would have expired in 2021. South Korea agreed to double its import quota for U.S. cars. Argentina, Australia, and Brazil were also exempted. The United States has a trade surplus with Australia.
At first, Trump said Canada and Mexico would be exempt until the his administration renegotated the North American Free Trade Agreement. Canada is the largest source of U.S. steel imports. Mexico is the fourth largest.
Mexico will also impose tariffs on imports from the United States. It will target industries in areas that supported Trump. These include flat steel, lamps, and pork products.
After the June 11, 2018, G7 meeting, Canadian Prime Minister Justin Trudeau said Canada would retaliate with tariffs.
The head of the U.S. Chamber of Commerce said Trump's trade war could cost 2.6 million U.S. jobs. He included the effects of Trump dumping NAFTA.
On August 10, 2018, Trump announced he would double the tariffs on aluminum and steel imports from Turkey. He was trying to obtain the release of jailed American pastor Andrew Brunson. Turkey claims he was involved in the 2016 coup to overthrow the government. The U.S. move lowered the value of the Turkish lira to a record low against the U.S. dollar. This renewed fears that the poor health of the Turkish economy could trigger another crisis in the eurozone.
Causes of U.S. Trade War with China
U.S. politicians have long threatened a trade war with America's largest trading partner in goods. A trade deficit occurs when exports are less than imports.
In 2017, the United States exported $130 billion to China. The three largest export categories are aircraft at $16 billion; soybeans, $12 billion; and automobiles, $11 billion. U.S. imports from China were $506 billion. Most of it is electronics, clothing, and machinery. But a lot of the imports are from U.S. manufacturers that send raw materials to China for low-cost assembly. Once shipped back to the United States, they are considered imports. As a result, tariffs hurt U.S. corporations as well as foreign ones.
China is the world's No.1 exporter. Its comparative advantage is that it can produce consumer goods for lower costs than other countries can. China has a lower standard of living, which allows its companies to pay lower wages. American companies can't compete with China's low costs, so it loses U.S. manufacturing jobs. Americans, of course, want these goods for the lowest prices. Most are not willing to pay more for "Made in America."
How It Affects You
The trade war is already increasing the prices of consumer goods that use steel and aluminum. Domestic manufacturers that rely on imported raw materials or parts are reacting to higher costs. Since their profitability is lower, their only other choice is to slash jobs. Soda and beer suppliers are the first to raise prices.
The tariffs give a competitive advantage to domestic producers of that product. Their prices would be lower by comparison. As a result, they would receive more orders from local customers. As their businesses grow, they would add jobs.
But Alliance of Automobile Manufacturers warned that even U.S.-produced steel will cost more once cheap foreign imports are eliminated. The move is "threatening the industry’s global competitiveness and raising vehicle costs for our customers."
Many U.S. industries were affected soon after Trump announced the tariffs. Mid-Continent Nail in Missouri announced layoffs because steel prices are now too high for them to remain profitable. Harley-Davidson announced it would move some production abroad to avoid retaliatory EU tariffs. The Maine lobster industry will suffer from Chinese retaliatory tariffs on U.S. seafood. California cheese makers are already seeing their markets in China and Mexico disappear due to retaliatory tariffs. Wisconsin auto parts manufacturers and the U.S. bourbon industry are other industries being punished.
Many U.S. imports from China originated in the United States. Raw materials are sent to China for processing, then exported back into America. An example is salmon caught in Alaska and sent to China for processing, then sent back to U.S. grocery shelves. If Trump imposes tariffs on seafood imports, it will raise prices by 25 cents to 50 cents a pound.
Foreign tariffs on U.S. exports will make them more expensive. U.S. exporters may have to cut costs and lay off workers to remain competitively priced. If they fail, they may cuts costs further or even go out of business.
In the long term, trade wars slow economic growth. They create more layoffs, not fewer, as foreign countries retaliate. The 12 million U.S. workers who owe their jobs to exports could get laid off.
Consultant Oxford Economics predicted the trade war could cost the global economy $800 billion in reduced trade. That could slow growth by 0.4 percent. It's occurring at the same time that oil prices and interest rates are rising.
Over time, trade wars weaken the protected domestic industry. Without foreign competition, companies within the industry don't need to innovate. Eventually, the local product would decline in quality compared to foreign-made goods.