Series 15 - Back to Brexit Basics – What are trade wars?

Jul 16, 2018

Last time, in Series 14 of Back to Brexit Basics, we looked at the free trade agreement that was recently agreed between the EU and Canada to get an understanding of what is included in a free trade agreement.  This week we look at the trade war involving the US and other countries and what it is all about.

The makings of a trade war

US President Donald Trump has long campaigned that he wants to make trade fairer.  He wants customers in the US to buy US made goods.  In an effort to encourage this, the US has imposed tariffs (or taxes) on imports from China, Mexico, Canada and the EU.  China has retaliated by putting tariffs on imports from the US and Mexico, Canada and the EU have said that they will do the same; thus escalating a trade war.  In another development this week, the US President seemed to hint at ongoing escalation of US sanctions, describing the EU as a “foe” when it comes to trade.

What is a trade war?

A trade war occurs when countries try to attack each other's trade with tariffs and quotas. One country will generally increase its tariffs on imports from the other country and the other country will respond with similar efforts.  The theory behind the trade war is that putting additional taxes and restrictions on imports, means consumers are less likely to buy the imported goods because they have become more expensive.  Instead, they will buy local products as they are cheaper and this in turn boosts the home economy.

China v US trade war

The US President has campaigned heavily about cutting US trade deficits, which is the difference between how much the US buys from another country compared with how much the US sells to another country.  The US has a huge trade deficit (reported to be $375 billion last year) with China. The US President has said for a long time that trade deficits hurt US manufacturing and to fix this he wants to increase tariffs on goods imported into the US. 

The US has already imposed tariffs on steel (25 percent) and aluminium (10 percent) on imports from the EU, Canada and Mexico.

Earlier this month, a 25 percent tariff was imposed on $34 billion of imports from China, which were largely manufacturing components.  China retaliated with tariffs of its own on US agricultural products and medical products.   And last week, the US President released a new list of $200 billion worth of goods from China that could attract a 10 percent tariff.  Most of these goods are categorised as auto parts, construction materials and processed food.  However these tariffs are subject to a consultation period that will complete at the end of August.

What is the effect of this trade war?

Some observers have said that the immediate effects of a trade war would be lower economic growth and increased inflation in both countries.  It could also affect global supply chains. For example, many technological exports from China contain parts made by US companies. And US goods manufacturers rely on parts from China to sell their goods worldwide so consumers outside of the US and China could be affected.   Companies may also have to relocate factories or distribution centres if imports become too expensive and this could affect employment and associated taxes.

If US imports become more expensive in China, traders in countries like Ireland and the UK could benefit from opportunities to expand into the Chinese markets and vice versa. 

The US buys nearly four times as much goods from China as it sells to them so therefore China may be limited in how far it can ‘war’ using tariffs and quotas.   Time will tell how this trade war will develop.

Read all of our Brexit updates and Back to Brexit Basics on the dedicated Brexit section of our website.