Trade War!

What is a “Trade War”?

Sometimes a particular country will put up economic or regulatory trade barriers to imports from another country in order to discourage that nation’s exports and provide an advantage to its own industries. A government may calculate that by reducing imports from the other country, it will protect its own industries and labor. But then the country that the trade barriers harm may retaliate by restricting what it imports from the offending country. A tit-for-tat competition can begin, with each side retaliating in an escalating trade confrontation. When two or more states begin to restrict each other’s imports and exports through tariffs or other trade barriers, the outcome is called a trade war.

Trade wars can begin a number of ways. When imports from one country begin to supplant another country’s domestic production, a government can come under pressure from its industry and labor groups to protect them from the foreign competition. The reasons can vary. Sometimes it is justified, due to the unfair trade practices by another nation. Or a country may have a severe balance of payments deficit with other countries and must restrict imports in order to avoid national insolvency. But often, protectionism is the result of one side’s desire to benefit at the expense of another. Greed can be a big motivator, both for businessmen and for politicians.

What Are the Weapons in a Trade War?

One of the simplest ways countries restrict imports from other countries is to place tariffs—a kind of tax—on imports from other nations. Tariffs make the imports more expensive and reduce the demand for the foreign products. This makes the products produced within the country more competitive and profitable—and, regrettably, more expensive for consumers.

Another weapon is regulation. A country can add regulatory requirements to imports that raise their prices or prevent their import altogether.

Sometimes a country will engage in currency manipulation to make its exports more attractive and imports less attractive. President Donald Trump has accused China of debasing the value of the Chinese yuan to make its exports more competitive to foreign markets, particularly that of the U.S. China, of course, denies the charge, and a former commerce minister of China said in early March 2017, “I’m seriously preparing for a trade war” (“Are U.S. and China Headed for ‘Hot War’ over Trade?”, Wall Street Journal, March 8, 2017). This is worrisome talk between great nations—in its own way, just one more “rumor of war” in our own headlines.

Another common weapon in trade wars is the use of import quotas, in which a country puts a quota on the amount of certain products that can be imported from another country. For instance, the U.S. has quotas on the amount of sugar that can be imported, and it provides sugar producers in the U.S. significant protection from low-cost foreign competition. However, the quotas increase sugar prices for U.S. consumers.

Government subsidies can be a weapon in trade relations, because subsidized industries in one country can dump their products at below cost in another country, thereby creating an unfair trade advantage.

To a degree, some trade barriers are commonly accepted among countries, and they do not necessarily result in retaliation leading to trade war.

What is an Example of a Trade War?

One of the best known—and most harmful—trade wars resulted from the Smoot-Hawley Act of 1930. CNN Money described what happened. “In 1930, Congress slapped tariffs on all countries that shipped goods to America in an effort to shield U.S. workers. It was called the Smoot-Hawley Act, named after two Republican Congressmen, Reed Smoot and Willis Hawley. And it is widely accepted that it made the Great Depression worse than it would have been… European countries, such as Spain, Italy and Switzerland, retaliated with tariffs of their own, and a trade war began… In total, the volume of U.S. imports fell 40% in the two years following Smoot-Hawley, which became law in June 1930” (Gillespie, Patrick, “Remember Smoot-Hawley: America’s last trade war worsened the Great Depression,” money.cnn.com, July 7, 2016).

Legislation intended to help American workers ended up reducing production and jobs in the U.S., instead. Trade war, like all war, has many victims, and the ones impacted the most are often the least able to bear it.

Trade wars can have winners and losers. But often, all sides lose, as participating countries suffer lower economic activity and employment.

How Can Governments Avoid Them for Now?

For the time being, trade agreements between countries are very helpful in avoiding trade wars. Governments negotiate agreements on what trade practices are fair and what trade barriers should be removed. To do this, each country participating in the agreement must give the other countries access to its domestic market on terms that are acceptable to their own constituencies at home. That can be a difficult process, but if done properly, it increases economic activity in each country involved.

The Bible has an even better explanation for the problem of trade war and how to solve it. The Apostle James wrote, “Where do wars and fights come from among you? Do they not come from your desires for pleasure that war in your members? You lust and do not have. You murder and covet and cannot obtain. You fight and war. Yet you do not have because you do not ask. You ask and do not receive, because you ask amiss, that you may spend it on your pleasures” (James 4:1–3).

Consider what the Apostle Paul wrote to the Church in Philippi. “Let each of you look out not only for his own interests, but also for the interests of others” (Philippians 2:4). That would certainly produce a favorable change in trade relations everywhere if nations obeyed it—but that is not likely to happen in today’s world.

There is bad news and good news about this situation. The bad news is that human nature has not changed, and prophecy speaks of conflicts between nations getting far worse before they ever get better (Revelation 6:3–4). The good news is that the Prince of Peace, Jesus Christ, is returning to set up a righteous government, and He will prevent all wars among nations in the future. That is the good news—the gospel—of the Kingdom of God. The prophet, Isaiah, recorded what Christ will do. “He shall judge between the nations, and rebuke many people; they shall beat their swords into plowshares, and their spears into pruning hooks; nation shall not lift up sword against nation, neither shall they learn war anymore” (Isaiah 2:4). We can expect that promise will include trade war as well.