Trade wars are "self defeating" in the long run for several reasons:
1. Economic inefficiency
Disruption of global value chains
In today's globalized economy, products are often the result of a complex web of international production processes. For example, a smartphone may be designed in one country, with its components sourced from multiple other countries, and then assembled in another. Trade wars disrupt these value chains. When tariffs are imposed, companies may be forced to source components from more expensive domestic suppliers or less efficient alternatives, increasing production costs.
A study by the World Bank found that the trade tensions between the United States and China led to a significant reconfiguration of global value chains, with some industries experiencing a decline in productivity due to the forced separation of previously integrated production processes.
Higher prices for consumers
Tariffs are essentially taxes on imported goods. When tariffs are imposed on a wide range of products, as in a trade war, the prices of those goods increase for domestic consumers. For instance, if a country imposes tariffs on imported steel, the cost of products made with steel, such as automobiles and construction materials, will likely go up.
In the United States, some consumer goods manufacturers faced higher costs due to tariffs on imported raw materials during the U.S. China trade war, and these costs were often passed on to consumers in the form of higher retail prices.
2. Impact on businesses
Loss of market access and competitiveness
For exporting firms, trade wars mean reduced access to foreign markets. Tariffs imposed by other countries can make their products more expensive and less competitive in those markets. At the same time, domestic firms that rely on imported inputs may find it difficult to maintain their competitiveness as their costs rise.
European farmers, for example, faced significant challenges when trade disputes led to retaliatory tariffs on agricultural products. Their exports to certain markets declined, and they had to look for alternative markets or adjust their production levels.
Reduced innovation and investment
Uncertainty created by trade wars can lead to a decrease in business investment. Companies may be hesitant to invest in new technologies, expand production capacity, or engage in research and development if they are unsure about future market access and trade conditions.
In the tech industry, some companies postponed or scaled back plans for international expansion and investment during the height of trade tensions between major economies, fearing potential tariffs and trade restrictions on their products.
3. Global cooperation and diplomatic relations
Strain on international relations
Trade wars can lead to increased diplomatic tensions between countries. Instead of working together on global issues such as climate change, public health, and international security, countries become preoccupied with trade disputes. This can undermine international cooperation mechanisms and make it more difficult to address common challenges.
The trade war between the United States and its trading partners during the Trump administration strained relations not only in the economic realm but also had spill over effects on political and diplomatic relations, making it more challenging to coordinate on issues like the North Korea nuclear problem.
Fragmentation of the global trading system
Trade wars can contribute to the fragmentation of the global trading system. When countries engage in tit for tat tariff measures and abandon multilateral trade agreements or dispute resolution mechanisms, the global trading order becomes less cohesive. This can lead to the formation of trading blocs based on political rather than economic efficiency, ultimately reducing the overall benefits of international trade.
The rise of some protectionist measures in recent years has threatened the stability and integrity of the World Trade Organization (WTO) and the rules based global trading system it represents.
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