What is Tariff War?

A tariff war is an economic battle between countries where they levy additional tax on each others exports.

Key Takeaways

  • A tariff war is an economic battle between countries where they levy additional tax on each others 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 War

In a tariff war Country A raises tax rates on Country B’s exports, and Country B then raises taxes on Country A’s 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.

A country might 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.”

Donald Trump is the first American president to wage a tariff war since Herbert Hoover.

History of Tariff Wars

The U.S. had not imposed high tariffs on trading partners since the 1920s and early ’30s. Because of the tariffs in that era, overall world trade declined 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.

In the post World War II period, Donald Trump was one of a few presidential candidates to speak about trade inequities and tariffs. 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.

In December 2016 rumors circulated that President-elect Donald Trump’s transition team wanted to propose tariffs, but President Trump did not act until January 2018, when solar panels and washing machines were targeted. In March 2018 tariffs of 25% were added to imported steel and 10% on imported aluminum. 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% tariff on 120 U.S. products sold in China and 25% on eight products, such as pork. In response, President Trump added $100 billion worth of Chinese products to the list.

$360 billion

The value of the Chinese goods on which President Donald Trump has imposed tariffs as of the beginning of September 2019.

As of September 2019, President Trump had imposed tariffs on $360 billion worth of Chinese goods, with China lashing back at $110 billion of U.S. products. Trump promised more to come on October 1, 2019, though he delayed some of those new tariffs until December 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.

Many economists and trade organizations that represent large U.S. companies were opposed to the tariff war from the outset, but supporters included the AFL-CIO, which is the largest U.S. labor union, and Ohio’s Senator Sherrod Brown (D), because he stated it would provide a boost to Ohio’s steel plants. Republicans have generally been more cautious, with former Speaker of the House Paul Ryan, while still in office, and Senate Majority Leader Mitch McConnell urging Trump to rethink his proposal or to target the tariffs more narrowly.

Nobel laureate economist Robert Shiller, of Yale University, warned in March 2018 that a trade war could push the U.S. economy into recession. Nevertheless, with the American president having unlimited power over the imposition of tariffs, the only person whose opinion ultimately matters on this tariff war remains Mr. Trump himself. In March 2018 he tweeted that “trade wars are good, and easy to win.”

Tariffs have hurt American farmers so much that President Trump, in collaboration with Congress, had to give them aid in the form of economic subsidies to ease their economic suffering. Perhaps realizing that this was mutually destructive, U.S. and China agreed to a trade deal that was signed on January 15, 2020, but the subsequent COVID-19 pandemic is threatening further escalation of trade tensions between the two nations which might bring back the tariff war.