All About Trade War

Date : June 08, 2019

As per the Oxford dictionary, war is a state of armed conflict between different countries or different groups within a country. Cicero defines war broadly as "a contention by force"; Hugo Grotius opines that "war is the state of contending parties, considered as such"; Thomas Hobbes adds that war is also an attitude: "By war is meant a state of affairs, which may exist even while its operations are not continued;" Denis Diderot says that war is "a convulsive and violent disease of the body politic;" for Karl von Clausewitz, "war is the continuation of politics by other means", and so on.

So, it can be inferred that war is not limited to only an armed conflict as what war is conventionally perceived to be. It has been in a lot of different forms like cold war, civil war, proxy war, invasion, religious war, etc. A new entrant in this list is trade war. So we will look into what it is, how it affects economy, how it happens and how it can affect India’s economy.

What is trade war?

In simple words, trade war is a kind of war in which the war is based on trade i.e. the countries in such war tries to hamper the trade of the other country. It is mainly done by raising import tariffs, imposing quotas on tariff or putting some other restrictions on the imports of the opposing country for retaliating. A tariff is a tax or duty imposed on imported goods being imported into a nation. When the tariff is imposed on a good then the price of the good has to be increased in order to compensate for the tariff imposed. Hence, the price of the good will increase and if the price is not increased then the quality of the product will be compromised. In both the situations, the market for the imported goods will be hampered and it won’t be able to give competition to domestic products. Ultimately the country will have to bear some loss and the other country will retaliate by doing the same.

A trade war keeps spreading from one sector to other sectors and it also leads to the addition of other countries and it can also affect other countries which are not involved in the trade war.

It is different from other measures taken to control imports and exports, such as sanctions. It has a damaging effect on the relations of the countries.

How it affects the economy?

As a result of trade war, however, the market for domestic products will increase and such demand will add jobs to the local workers but in the long run, a trade war costs jobs, depresses economic growth for all the countries involved, triggers inflation because of the increased tariff on the imports. As trade war increases it leads to the reduction in international trade. To see how it affects the economy we can see the example of Smoot-Hawley Tariff.

Smoot-Hawley Tariff

Smoot-Hawley Tariff Act, formally United States Tariff Act of 1930, also called Hawley-Smoot Tariff Act, U.S. legislation (June 17, 1930) that raised import duties to protect American businesses and farmers, adding considerable strain to the international economic climate of the Great Depression.

The Smoot-Hawley Tariff Act raised the United States’s already high tariff rates. Smoot-Hawley contributed to the early loss of confidence on Wall Street and signalled U.S. isolationism. By raising the average tariff by around 20 percent, it also prompted retaliation from foreign governments, and many overseas banks began to fail (Because the legislation set both specific and ad valorem tariff rates [i.e., rates based on the value of the product], determining the precise percentage increase in tariff levels is difficult and a subject of debate among economists). Within two years some two dozen countries adopted similar “beggar-thy-neighbour” duties, making worse an already beleaguered world economy and reducing global trade. U.S. imports from and exports to Europe fell by around two-thirds between 1929 and 1932, while overall global trade declined by similar levels in the four years that the legislation was in effect.

Why does such war happen?

The main reason for the happening of such war is protectionism. A lot of countries in order to protect their local businesses and jobs from foreign competition take some action or implement some policies that restrain international trade so that the local business and jobs are not hampered because of the competition arising from foreign imports. When one country in order to implement protectionism increases tariffs or sets quotas on foreign imports then the other country has to bear some loss. Hence, the other country also in retaliation puts quotas and raises tariffs on the imports of that country. This leads to trade war between those countries.

It also happens when one country applies unfair trade practice or if the other country thinks that the other country is applying unfair trade practice or some other reasons also in order to inflict sanction on the other country.

How could it affect India's economy?

If India directly goes into such trade war then there is no uncertainty that India will suffer a great loss because of that as India doesn’t have lots of good producers of goods in the domestic market, they won’t be able to match the level and quality of imported goods. Also, when the competition is reduced, then the quality of domestic products and services will also be of a minimal standard.

We can look into the times of 1990 when the policy of liberalisation, privatisation and globalisation was not there. At that time India was in a huge economic loss and hence it had to go for these reforms. So, we can say that it going into trade war won’t be feasible for India in the long run.

We can also look how other countries involved in the trade war effect India e.g. US-China trade war. Due to the US-China trade war, it can lead to a fall in the value of Indian rupee. It can also lead to the fall in the cost of crude oil which will benefit India. Overall, it is uncertain as to what effect it will put on India.

Conclusion

Protectionism, however, can be beneficial for a country in short run but in the long run, it is always detrimental. It leads to trade war which is not only detrimental to the countries involved in the trade war but also to other countries not involved in it. It worsens the economy of the countries involved and relation ties between the countries. Getting into trade war will however protect the domestic companies from unfair competition, increase demand for domestic goods, promote local job growth, Improve trade deficits, punish nation with unethical trade policies but will also lead to increased costs and induce inflation, cause marketplace shortages, reduce choice, discourage trade, slow economic growth, hurt diplomatic relations and cultural exchange.

Getting into a trade war and getting success out of it depends on how well it is strategized and implemented but globally it will always have adverse effects.

About the Author: Arunesh Chandra, Intern at IP and Legal Filings  and can be reached at support@ipandlegalfilings.com.

References:

[1]https://www.britannica.com/topic/Smoot-Hawley-Tariff-Act

[2]https://www.investopedia.com/terms/t/trade-war.asp

[3]https://www.iep.utm.edu/war/

[4]https://yourstory.com/2018/08/us-china-trade-war-impact-india