Most economists and international policy makers argue that free trade and open international markets are the keys to global economic growth and wellbeing. The mutual reduction of protection expands the division of labor and the volume of trade, which increases national income. Economists and policy makers favor letting countries trade freely with few trade barriers. But although free trade seems to bring net gains for both nations and the world, sometimes a trade war begins.
A trade war refers to two or more nations creating trade barriers, such as tariffs, state subsidies, or import quotas, on each other to restrict international trade. A trade war can also be defined as an international conflict, which begins when one country (or group of countries) wants to hurt another country (or countries) with the help of trade policy measures. A country seeking to improve its terms of trade may provoke retaliatory behavior from other trading partners, making all parties concerned worse off. So, at the heart of any trade war is the belief that changes in trade arrangements can have huge impacts on domestic economies, on labor markets, and on social well-being.
Since the mid-1980s, there has been a dramatic increase in regional trade agreements (RTAs), some involving several parties and others purely bilateral in nature. Regional integration structures vary from “free trade areas,” in which members remove internal trade barriers among themselves but permit members to retain independent external tariff policies with the outside world, to “customs unions,” in which members again remove all barriers to trade among themselves and also adopt a common set of external barriers. These two types of economic blocs are simply trade blocs and an important move toward free trade.
The formation of the European Union’s (EU’s) customs union is the first major modern trade bloc. The North America Free Trade Agreement (NAFTA), Mercosur/Mercosul, and the Asia Pacific Economic Cooperation (APEC) forum set up by countries in the Far East are other good examples of economic trade liberalization. This trade bloc revolution has raised the importance of trade discrimination and international trade wars.
At the same time, during the last few years, world trade has been facing higher growth rates. Emerging east Asian countries have followed an export-led development strategy that has negatively affected the U.S. and EU trade deficit. The more immediate threat to trade from trade deficit is the ammunition it has provided for increasing trade protectionism, which leads to trade wars. When a country is facing a trade deficit, it can either choose a free trade policy or impose a tariff on imports, which raises its own real income. When a country imposes a tariff on imports, foreign producers need to fully pass it on to domestic consumers, increasing product prices and becoming less competitive. This predatory behavior by one of the trading partners induces retaliation by the other, and it can end up in a trade war. Cooperation, in the form of trade agreements, offers a good solution to this problem, mainly if trade agreements are effectively enforceable. This is what the World Trade Organization (WTO) tries to do.
Changes in government, laws, or practices that protect or promote domestic or regional commercial interests at the expense of foreign interests are at the heart of most international trade conflicts. After World War II, the world’s community of trading nations negotiated trade rules, which are now entrusted to the WTO. The WTO’s procedure for resolving trade quarrels under the Dispute Settlement Understanding is vital for enforcing the rules, and therefore ensures that trade flows smoothly. Broadly, a country with a complaint requests a consultation, and, if the dispute is not resolved, the complaining country may request the establishment of a panel.
After the panel issues its decision, both disputing parties have the right to appeal. After the conclusion of all such proceedings, the Dispute Settlement Body (representatives of all the WTO members) adopts the report, unless it decides by consensus to reject it. Confidence in the system is borne out by the number of cases brought to the WTO—more than 300 cases since 1995 compared to the 300 disputes dealt with during the entire life (1947–94) of General Agreement on Tariffs and Trade (GATT). Nontariff barriers are the most frequent targets of complaint, followed closely by a large number of cases dealing with unfair trade practices or the measures taken to offset them (state subsidies, antidumping/countervailing duties).
The European Union And The United States
Two of the major players in world trade are the EU and the United States. Both support free trade, but they often accuse each other of pursuing protectionist policies or giving unfair advantages to its own exporters through state subsidies or safeguard actions, as in the case of imposition of tariffs on steel imports by the U.S. government. In the case of steel, the U.S. government alleged that many EU companies benefitted from earlier state subsidies and engaged in dumping steel products. Another famous trade dispute was the bananas case, where the EU was found guilty of discrimination against banana imports by U.S. companies in Latin America in 1997. The United States unilaterally applied a set of sanctions on a variety of EU goods because of the preferential banana trade agreement. The United States claimed that it was protecting its domestic interests, while the EU claimed that the United States was manipulating WTO rules to implement sanctions against countries trading with regimes it did not like. The bananas case presents two different long-standing questions about trading: whether nations can impose their will whenever they wish, and how free is the free market. Other trade conflicts between the United States and the EU stem from domestic regulatory policies. Conflicts over hormone-treated beef, bioengineered food products, and protection of the audiovisual sector, for example, are rooted in different U.S.-EU regulatory approaches, as well as social preferences.
From a political economy point of view, governments care about the political consequences of their trade policy, protecting the firms that provide the funds for their election and the individuals who vote for them. Within this context, trade wars can be seen as a direct outcome of domestic interests. So, most major economists would conclude that the story behind trade wars is one of protectionism—pure and simple.
- Bagwell and R. W. Staiger, The Economics of the World Trading System (MIT Press, 2002);
- Frank Cain, Economic Statecraft during the Cold War: European Responses to the US Trade Embargo (Routledge, 2007);
- John A. C. Conybeare, Trade Wars: The Theory and Practice of International Commercial Rivalry (Columbia University Press, 1987);
- Ronald Findlay and Kevin H. O’Rourke, Power and Plenty: Trade, War, and the World Economy in the Second Millennium (Princeton University Press, 2007);
- John W. Head, Losing the Global Development War: A Contemporary Critique of the IMF, the World Bank, and the WTO (Martinus Nijhoff Publishers, 2008);
- Marie Thorsten, Superhumanizing Japan: Imaginaries of the US-Japan Trade War (Routledge, 2009);
- Ka Zeng, Trade Threats, Trade Wars: Bargaining, Retaliation, & American Coercive Diplomacy (University of Michigan Press, 2004);
- Daowei Zhang, The Softwood Lumber War: Politics, Economics, and the Long U.S.-Canada Trade Dispute (Resources for the Future, 2007).
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