Trade Wars
Now, before getting into the thick of it, the first thing we should clear out is the purpose of trade. Countries have the ability to exchange goods and services amongst each other, which not only allows consumers a wider variety of choice but also allows countries to specialise in certain commodities and thus partner up with other countries.
Trade wars, however, is the opposite situation, when countries decide to prevent trade between each other by imposing restrictions such as tariffs (import taxes), quotas and other barriers.
The logic behind creating such a situation is to protect a country’s domestic industries. For example, if consumers in the US are given the choice between importing electronics at a cheaper price from China, instead of buying from US producers at a higher price, they will choose the former.
This situation, however, threatens the US technology industry from losing out on profits and ultimately becoming obsolete, which is not an ideal scenario for the US government.
Therefore, in order to protect their domestic industries, the US government will impose tariffs and quotas on imports from China to make them more expensive, thus reducing their demand. This ideally is how the trade war begins.
Now, the question you might have is, why we make it sound so melodramatic by using a term as serious as ‘war’. Well, the problem is how things start to go downhill right after said trade war begins.
As one country steps in with these tariffs, the opposing country retaliates with its own tariffs and quotas accordingly. Before you know it, both countries not only significantly reduce both imports and exports between each other.
But the problem that arises is when domestic industries fail to satisfy the consumer’s demands. Because, if the end result is consumers still importing goods from the now tariffed country, the consumers are the ones who actually end up paying these tariffs.
Looking at the current US-China trade war, we can learn a lot about such scenarios. US companies are suffering, as they’re heavily reliant on the import of steel and aluminum from China, but tariffs have greatly reduced their potential for making a profit.
Usually, in such trade wars, one country usually comes out on top, and that country is the one who can rigorously compete by its ability to cut prices. And since China is easily able to do that, they seem to be currently gaining out of the situation.
The take away from all this is that, trade wars have real-life consequences on the consumers, not the government. Trying to artificially protect domestic industries with tariffs doesn’t always work in your favour unless you have the necessary power to get efficient prices to negate the effect of the tariffs. And finally, it sours relationships between two countries who could, in another scenario, work together to better benefit their respective citizens.
Aaqib is stuck in an existential crisis loop. Send help at [email protected]
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