Trade War
Trade war is a situation that arises when a country increases tariff on the imports from another country and the second country retaliates to the action in the same manner.
What is meant by trade war?
Suppose there are two countries Country A and Country B enjoying trade relations. The manufacture’s associations inside the Country A feel that Country B is following unfair practices and dumping goods in their country to spoil their production. They request government to make imported goods less attractive to consumers. The government accedes to the request by increasing tariff on the imported products from Country B. In retaliation, Country B raises tariff on imports from Country A. This affects the trade relations between the two countries and a trade war begins.
A trade war has two legs. In the instant case, in the first leg Country A perceives the trading practices being followed by Country B is unfair and that inaction by them may impact their businesses and production within the country. The tariff increase can be on a particular item or group of items. The second leg becomes active when Country B reacts to the action by increasing tariff on the imports from Country B.
What are the negative impacts of a trade war?
A trade war that starts in one segment may grow to affect other segments too. Similarly, the trade war that initially begins between two countries may spread to other countries to when they start joining side. The feature of trade war is that it mainly affects the trading relation between the two countries which if prolonged starts affecting entire economy. The seriousness increases when sanctions are imposed by trade blocks on the members of opposing blocks. This affects the free trade among countries and severely impacts countries the economy of which are more depended on income from exports. .
We l live in a highly globalised world. Trade war upsets the fundamental premise on which global trade takes place and affects global growth. When large, developed and industrialised nations create new barriers for inflow of goods and services, the action can drastically impact the economy of the country on receiving end. All predictions and estimates of global economic growth, inflation and interest rates go out of control.
Sometimes trade wars lead to currency wars making global markets unstable.
Why is trade war in news now?
The round of discussion on trade war began when the US in March 2018 imposed 25 % and 10% duty on steel and aluminium imports from certain countries. This was done citing national security and job creation in US. A 25% tariff was then imposed on over 1,300 other Chinese products. China hit back by raising duties on imports from US, including walnuts, raisins and almonds. The value of business at threat from the actions of two countries is in the range of $100-150 billion. The European Union too joined the trade war with a 25 per cent levy on certain US products. It is expected that the situation would be normalized soon through talks between US and China in coming days.
