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What is a Trade War?

Mary McMahon
By
Updated May 16, 2024
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A trade war is a form of policy war where two nations square off against each other with a series of escalating punitive trade policies. While no shots are fired in a trade war, such policy wars can be very harmful to foreign relations, as well as national economies, and nations must consider the risk of setting off a trade war when they develop trade and economic policy. When the nations involved are at a political, economic, or social imbalance, the war can potentially be devastating for the loser, as seen when a developed nation engages in a trade war with a developing country that cannot compete.

Trade wars typically start with a policy decision one nation sees as hostile to trade relations, such as a change in tariffs and taxes, the creation of new subsidies, and other policies suggestive of economic protectionism. A nation might, for example, restrict fruit imports from another country due to concerns about invasive insects or fungi. The other nation retaliates with a new policy of its own, like an increased tariff on imports from the target country, and a series of policy changes can be sparked, often with specifically punitive goals in mind.

Imbalances can emerge in a trade war. A nation relying heavily on one country for imports or exports may experience economic disturbances as a result of the policy shifts, such as an inability to sell goods overseas. People relying on foreign trade for income, like farmers counting on the sale of their crops, may be impoverished by changing trade policies and this can also create political and social unrest. International organizations may become involved in an attempt to mediate the trade dispute.

The threat of a trade war is sometimes used as a negotiating tool when nations are attempting to make a trade agreement. It can also be used as a warning; if a country is thinking about implementing a new policy or charging a rival with trade manipulation, the target may suggest that the decision to go public could spark a trade war. If the nation is in a vulnerable position, the threat of trade sanctions may be enough to force it to abandon the idea.

Trade wars could be viewed as a natural outgrowth of foreign relations, free trade, and economic policy. As nations jockey for position in the global market, they use a variety of tactics to get ahead and some of these tactics can involve punitive measures against rivals or efforts to protect domestic trade.

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Mary McMahon
By Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Discussion Comments
By fBoyle — On Dec 15, 2014

I actually kind of admire countries that are willing to take on a trade war rather than allowing another country to manipulate them and force them to take up policies. It's not right to intervene in the way that other countries run themselves. So I think I agree that we need to keep economic aspects separate from political issues. Sometimes, trade wars can be detrimental to people and cause a lot of innocents to suffer, like the embargoes placed on Gaza for example.

By turquoise — On Dec 15, 2014

@stoneMason-- I think that trade wars are silly. It's when countries act like little kids having a tantrum. It serves no purpose. Trade is beneficial to both parties involved and I think it doesn't make sense to take things that far.

I mean, if we look at Iran, they haven't been trading with the US for a long time now and they are doing fine. It's not like the world ended for them. So using embargoes like some sort of punishment doesn't work.

And what about Cuba?! The problems with Cuba were so long ago. A lot of water has passed under the bridge since then. Why can't we just forgive, forget and move on?

By stoneMason — On Dec 14, 2014

When two countries don't get along politically, they usually start a trade war by imposing high tariffs and sometimes even embargoes. This is usually a last resort though. Countries do this as a form of protest and to alienate the country economically. Underlying it though is a serious ideological disagreement between the countries and sometimes a lot of verbal aggression too.

For example, there are such trade wars between the US and North Korea, Cuba and Iran.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a...

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