“The biggest single thing that has lifted people out of poverty is free trade.” – George Osborne
What is a Trade War?
According to Investopedia, a trade war occurs when one country increases tariffs on another country’s imports in retaliation to the second country raising its tariffs. A tariff is a tax on imported goods and services. Unfortunately, history has shown that trade wars lead to economic downturns. As a result, neither country wins.
Current U.S. Trade War
The cause of our current trade war is due to protectionism – the act of protecting local and domestic businesses from foreign competitors. As of March 2018, The U.S waged trade wars against China. It was later expanded to Mexico and Canada.
On May 31, 2018, a 25% tax on steel and 10% tax on aluminum was enforced on Canada and Mexico. USTR.GOVreports that “Canada is currently our 2nd largest goods trading partner with $582.4 billion in total (import/export) goods traded.“
Trade War Impact
A trade war is likely to have a negative short-term effect on the economy through increased prices for domestic and foreign goods or services. Expect to see an increase in the cost of items like cars, home appliances, food, clothes, and lumber (20% tax on lumber imported from Canada). Increased lumber prices will increase the cost to build homes, which will result in the increase in housing costs, too.
This increases the concern of potential job loss. For example, if steel and aluminum prices increase, businesses may need to make up for lost profits by cutting salaries or cutting jobs. This could be the early signs of the next recession, which is predicted to take place in the 3rd quarter of 2020.
Chart provided by Statista.com
There seem to be more cons than pros when discussing trade wars. Economists agree that trade wars often lead to a decrease in economic growth. A trade war may be intended to boost the U.S economy; however, history shows that they lead to financial turmoil even for a strong economy.
