DEFINITION of 'Trade War'

A trade war is a side effect of protectionism that occurs when one country (Country A) raises tariffs on another country’s (Country B) imports in retaliation for Country B raising tariffs on Country A's imports. A tariff is a tax imposed on imported goods and services.

Trade wars can commence if one country perceives another country's trading practices to be unfair or when domestic trade unions pressure politicians to make imported goods less attractive to consumers. Trade wars are also a result of a misunderstanding of the widespread benefits of free trade.

BREAKING DOWN 'Trade War'

A trade war that begins in one sector can grow to affect other sectors. Likewise, a trade war that begins between two countries can affect other countries not initially involved in the trade war. As noted above a trade war can result from a protectionist penchant. Protectionism represents government actions and policies that restrict international trade, generally with the intent of protecting local businesses and jobs from foreign competition. In 2017 and 2018, President Donald Trump has embarked on a protectionist campaign, attempting to bring manufacturing jobs back to the United States from other nations to where they have historically been outsourced, such as China and India.

A trade war is distinct from other actions (e.g. sanctions) that have detrimental effects on the trading relationship between two countries in that its goals are related specifically to trade. Sanctions, for example, may also have humanitarian goals.

Trade War and the Debate Over Protectionism

The advantages and disadvantages of protectionism are the subject of fierce debate. Critics argue that protectionism often hurts the people it is intended to protect long-term by slowing economic growth and cultural exchange. Protectionism can lead to price increases with manufacturing in particular often being more expensive domestically. Proponents of protectionism argue that well crafted policies provide competitive advantages and create more jobs. In addition to tariffs, protectionist policies can be implemented by placing a cap on import quotas, setting clear product standards, or implementing government subsidies for U.S. processes to deter outsourcing.

In 2018, President Donald Trump has threatened significant tariffs on Chinese goods, as much as $500 billion on products including steel and soy. He has also threatened to pull the U.S. out of the World Trade Orgaization. The WTO is the only global impartial organization that regulates trade among the 164 countries that belong to it.

RELATED TERMS
  1. War Economy

    War economy is the organization of a country's production capacity ...
  2. Multiple Column Tariff

    A tariff system where the tariff rate or import tax assessed ...
  3. War Risk Insurance

    War risk insurance provides financial protection against losses ...
  4. Price War

    Price war refers to a circumstance where rival companies continuously ...
  5. Section 232 of the Trade Expansion ...

    Section 232 of the Trade Expansion Act of 1962, authorizes the ...
  6. War Bond

    A war bond is a debt security issued by a government for the ...
Related Articles
  1. Investing

    Wall Street's Biggest Fear Is Trade War: Survey

    A trade war sparked by Trump's tariffs is the biggest concern among market watchers, says CNBC.
  2. Investing

    Trump’s China Tariffs: What’s at Stake for the US?

    Will the U.S. trade tariffs on China hurt American businesses, jobs and customers? Yes, says the majority.
  3. Investing

    Charles Schwab: Trade War Would 'Wreak Havoc' on Global Supply Chains

    Trade wars would pressure global supply chains, hurt growth and negatively affect inflation, says Schwab's chief investment strategist.
  4. Investing

    US Futures Plunge After China Retaliates to Trump Tariffs

    Beijing’s announcement took stock markets by surprise, causing the likes of Boeing, Ford and General Motors to fall in pre-market trading.
  5. Investing

    Charles Schwab: Investors Should Have Global Exposure Despite Tariffs

    Despite the new tariffs, Charles Schwab said that everyone should have international stocks in their portfolio.
  6. Investing

    Why Techs, Banks May Outperform In a Trade War

    Credit Suisse indicates which stocks are likely to suffer in a trade war, and which may ride it out.
  7. Investing

    E*TRADE: With Tariffs Official, Best to Take a Wait-and-See Approach

    With tariff proposals now signed by President Donald Trump, investors are best served taking a wait-and-see approach, advised E*TRADE.
  8. Insights

    IMF Says Trade Barriers Will Hamper Global Growth

    Rising support for protectionist policies in countries around the world will hamper global economic growth, IMF officials say
  9. Investing

    Can ETFs Help You Benefit From a Trade War?

    Trade has become a major concern for the market. Can ETFs help investors stay on top of the fracas?
  10. Investing

    3 Ways China Could Hurt American Businesses

    Limited by a trade surplus with the U.S., Beijing could take other measures to fight back.
RELATED FAQS
  1. How do tariffs protect domestic industries?

    Understand how tariffs are used by domestic government to protect its domestic industries, how they are levied, and whether ... Read Answer >>
  2. Is it possible for a country to have a comparative advantage in everything?

    Learn whether one country can have a comparative advantage in everything and what the difference between comparative advantage ... Read Answer >>
  3. What economic indicators are most used when forecasting an exchange rate?

    Discover what economic indicators are most widely used to forecast a country’s exchange rate and how various factors influence ... Read Answer >>
  4. What is foreign exchange?

    Foreign exchange is the conversion of a country's currency into another. In a free economy, a country's currency is valued ... Read Answer >>
Hot Definitions
  1. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  2. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  3. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  4. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  5. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  6. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
Trading Center