15.2 Trade wars and protectionism

Trade wars and protectionism are hot-button issues in international economics. Countries use tariffs, quotas, and other barriers to shield domestic industries from foreign competition. This can lead to retaliatory measures, escalating into full-blown trade wars.

The impacts of trade wars ripple through the global economy. They reduce trade flows, disrupt supply chains, and slow economic growth. Multilateral trade agreements and organizations like the WTO aim to prevent and resolve these conflicts, but their effectiveness varies.

Trade Wars and Protectionism

Trade wars and protectionism definition

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• Trade wars arise when countries engage in retaliatory trade barriers against each other, typically by increasing tariffs (import taxes) or imposing quotas (limits on imported goods) to protect domestic industries and jobs from foreign competition
• Protectionism is an economic policy that restricts imports through various trade barriers, shielding domestic industries from foreign competition
• Examples of protectionist measures include tariffs, quotas, subsidies (financial support for domestic industries), and non-tariff barriers such as regulations or bureaucratic procedures that hinder foreign firms from entering the market

Causes of trade wars

• Economic factors contribute to trade wars, such as trade imbalances where a country consistently imports more than it exports, leading to a trade deficit
• Perceived unfair trade practices, such as accusations of currency manipulation, intellectual property theft, or dumping (selling goods below cost), can trigger trade disputes
• Domestic industries facing competition from imports may lobby for protectionist measures to safeguard their interests
• Political factors also play a role in trade wars:
  • Nationalism and populism can lead politicians to use protectionist rhetoric to appeal to voters concerned about job losses and economic insecurity
  • Geopolitical tensions between rival countries can result in trade disputes being used as a tool to exert pressure
  • Governments may use trade wars to distract from domestic issues or boost their popularity

Impact and Mitigation of Trade Wars

Impact of trade wars on global economy

• Trade wars lead to reduced trade flows as higher tariffs and other trade barriers decrease imports and exports between the countries involved
• Countries may engage in trade diversion, shifting their trade to other partners to avoid the higher costs associated with the trade war
• Decreased trade slows down economic growth due to reduced efficiency and productivity
• Higher prices for consumers and businesses resulting from tariffs can reduce purchasing power and investment
• Uncertainty caused by trade wars can lead to decreased business confidence and investment, further dampening economic growth
• Trade wars disrupt global supply chains, as many products are made with components from multiple countries, forcing companies to reorganize their supply chains and incur increased costs and reduced efficiency

Effectiveness of multilateral trade agreements

• The World Trade Organization (WTO) provides a framework for negotiating and enforcing trade agreements among its 164 member countries
  • WTO's dispute settlement mechanism allows countries to resolve trade conflicts through a rules-based system
  • However, consensus-based decision making can be slow, and enforcement of rulings can be challenging
• Regional trade agreements, such as the European Union (EU), United States-Mexico-Canada Agreement (USMCA), and Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), promote trade liberalization and establish rules for trade among member countries
  • These agreements help reduce trade barriers and provide a forum for resolving disputes
• Bilateral trade agreements between two countries can effectively address specific trade issues
  • However, bilateral agreements may not address broader, systemic issues in the global trading system