Tariff War Definition

What Is a Tariff War?

A tariff war is an economic battle between countries where each levies an additional tax on the other's exports. Tariff wars generally start when leadership in one country is unhappy with a trade partner's trading behavior or for geopolitical reasons.

Key Takeaways

  • A tariff war is an economic battle between countries where they levy additional taxes on each other's exports.
  • A tariff war is designed to hurt the other country economically, as tariffs discourage the citizens of the importing country from buying the exporting country's product by raising the total cost of those products.
  • Historically, tariff wars are mutually destructive over the long run, though they might offer some short-term benefits.

Understanding Tariff Wars

In a tariff war, one country raises tax rates on another's exports. The recipient of the first country's taxation then raises taxes on its exports in retaliation. The increased tax rate is designed to hurt the other country economically, as tariffs discourage the citizens of the importing country from buying the exporting country's product by raising the total cost of those products.

One country may incite a tariff war because it is unhappy with one of its trading partners’ political decisions. By putting enough economic pressure on the country, it hopes to force a change in the opposing government’s behavior. This type of tariff war is also known as a customs war.

The Effect of Tariff Wars

Tariff wars often have unintended consequences and tend to affect businesses and consumers on each side negatively. For example, China is one of the world's largest (if not the largest) soybean importers. The U.S. is one of the largest soybean exporters. In response to tariffs put in place by the U.S., China placed a 25% tariff on soybeans from the U.S.

Brazil, another large soybean exporter, also exports to China. There was no tariff on Brazil's soybean exports, so it naturally experienced an increase in soybean exports to China. This drop in demand for U.S. soybeans caused farmers to end up with more than 3.7 billion bushels of soybeans in storage in 2018. Soybean sale losses were so high that the U.S. government compensated soybean—and other commodity—farmers to the tune of billions of dollars.

The Chinese, in turn, had to pay more for soybeans because demand remained the same. Brazil's soybean prices increased by $0.97 per bushel. Chinese soybean imports from Brazil increased to compensate for the supply change; however, because Brazilian soybean prices increased, China ended up paying about the same for soybeans as it would have if it imported from the U.S. and paid the tariffs. The retaliatory tariff ended up hurting Chinese businesses and consumers anyway.

Other issues arise when tariff wars occur. Supply chains are affected, and real exports and GDP decline. Companies might be forced to hire fewer employees, and capital losses could be significant. In 2020, the Federal Reserve found that the trade war with China had cost U.S. firms $1.7 trillion in market capitalization.

History of Tariff Wars

The U.S. didn't impose high tariffs on trading partners until the 1920s and early 1930s. Tariffs in that era contributed to an overall decline in world trade of about 66% between 1929 and 1934. The Smoot-Hawley Tariff Act of 1930 is generally credited with seriously exacerbating the Great Depression, leading to the election of President Franklin D. Roosevelt, who, in 1934, signed the Reciprocal Trade Agreements Act that reduced tariff levels and liberalized trade with foreign governments.

Recent Trade Wars

Donald Trump was one few presidential candidates to speak about trade inequalities and tariffs in 2016. He vowed to take a tough line against international trading partners, especially China, to help American blue-collar workers displaced by what he described as unfair trade practices.

When he took office in 2017, his administration first targeted solar panels and washing machines from China. In March 2018, tariffs of 25% were added to imported steel and 10% on imported aluminum.

Tariffs on China

Several countries were exempted, but Trump announced that the U.S. government would apply tariffs on $50 billion worth of Chinese imports. That led to back-and-forth tariff announcements as the Chinese government retaliated in early April 2018 with a 15% or 25% tariff on imports from the U.S. that included 94 different U.S. foods and agricultural tariff lines. In response, President Trump added $100 billion worth of Chinese products to the list.

Trump promised more to come on Oct. 1, 2019, though he delayed some of those new tariffs until Dec. 15, 2019, to avoid hurting the Christmas shopping season. As a result of the tariff war, the manufacturing sector of the American economy saw factory output drop, tipping it into a recession.

Tariffs hurt American farmers so much that President Trump, in collaboration with Congress, had to give them $28 billion in subsidies to ease their economic suffering.

In the trade agreement commonly referred to as the U.S-China Economic and Trade Agreement (Phase One), China agreed to increase its purchase of certain U.S. goods and services by $200 billion through December 2021. However, China only imported 58% of the promised goods and services.

Trump-Era Tariffs Extended

In 2022, President Joe Biden extended Trump-era tariffs on solar panels and cells. However, a few months later, he declared an emergency regarding electrical services and temporarily suspended tariffs on specific solar cells and modules from Cambodia, Thailand, Vietnam, and Malaysia.

Do Tariffs Create Trade Wars?

Imposing tariffs on a trading partner can create a trade war. This is because the country on the receiving end of the tariff is generally unhappy with the action and imposes its own tariffs on its trade partner.

What Are the 3 Main Effects of Tariffs?

Tariffs generally raise consumer prices, decrease imports, and cause the recipient country to retaliate against the trade partner implementing the tariffs.

When Did the Trade War Start?

The latest trade war between the U.S. and China started in 2018.

Article Sources
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