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, up to potentially $100 billion as CNBC reported on April 23. While the U.S.-China tariff standoff has many investors concerned, it is not necessarily a harbinger of similar policies towards other nations and the European Union. Many investors are concerned over the threats, particularly those invested in commodities funds or commodities directly.

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