In the age of globalization, where economies are more interconnected than ever, the term tariff war has become a buzzword in international politics and economics. But what exactly is a tariff war, and why do countries engage in it? Let’s uncover this complex phenomenon and explore its causes.
Let’s understand the word ‘tariff’.
- Tariff means the taxes or duties levied by a country on another country with which it trades.
- These taxes make foreign goods more expensive, theoretically encouraging consumers to buy domestic alternatives that are taxed at lower rates.
- However, in practice, the globalized nature of production means that tariffs often hurt domestic businesses and consumers just as much—if not more—than foreign competitors.
What Is a Tariff War?
- A tariff war—also known as a trade war—occurs when countries retaliate against each other by continuously increasing tariffs on each other’s goods. It’s a tit-for-tat escalation where one country imposes tariffs, and the other responds with its own, often leading to a prolonged economic conflict.
- Suppose a country has imposed a tariff on another country for all the goods except for very few essential goods. In that case, the retaliating country may deliberately increase the price of those essential goods. They may even stop the export of such goods to the importing country completely. These steps will make importing goods costly. These retaliatory measures are also called a tariff war.
Key Characteristics:
- Involves multiple rounds of tariff impositions
- Driven by political, economic, or strategic motives (please see below in-depth discussion)
- Impacts global supply chains and trade flows ( please read my blog on Effects of the ‘Tariff War’ on the USA Itself – PolyBlogger.com)
- Often accompanied by diplomatic tensions
Generally, one country starts a tariff war to fulfil a political agenda. These agendas could be –
To trap another country
For example, the USA wants to trap India in a ‘divided minds’ situation. The USA says that if India buys oil from Russia, the USA will impose a 50% tariff. Here is a trap for India. Friendship with Russia is centuries old. But the trade with the USA is equally crucial for India. India’s self-interest is also prominent.
To curb the dominance, influence, and superiority
The most prominent example in recent history is the U.S.-China trade war, which began in 2018. The US imposed tariffs on hundreds of billions of dollars’ worth of Chinese goods, prompting China to retaliate with its tariffs on American exports. The USA is doing this to reduce Chinese dominance, influence, and superiority in Asia and globally.
To eradicate/control/reduce dictatorship
Complete sanctions are generally the only answer to a dictatorship. Such dictatorships are in North Korea, Iran, Venezuela, and in some African and Middle Eastern countries.
Avoiding Entry to the local market
To protect the local market and the business of the local sellers and manufacturers.
Generally, the above statement acts as a label of tariff war, but it may not always be the real reason. So, if any country says that it has imposed tariffs because it wants to protect its local markets and market participants, then it is up to us to accept it or not. It is up to us to understand the reasons behind it. No country will open its agenda for the obvious reasons.
Reduce the debt Burden
Sometimes, the agenda behind the tariff war is to reduce the country’s debt. The USA is probably trying to play the same game. The USA has nearly $46 trillion in loans, and they may be trying to get rid of them, but how?
Tariffs may bring money to the treasury.
It will discourage people from buying the imported products, only to stop the outflow of money.
If domestic production increases due to a rise in domestic consumption, it may lead to higher employment. Ultimately, it will bring more taxes through the income of the people.
Rising income may increase demand for domestic products. This cycle may work effectively.
Leap-Frogging
Wish to become dominant in every aspect.
Fear Factor
Fear of losing number one position, top market share, revenue, importance, global presence, global dominance, prestige, dread, etc.
The tariff war between the USA and China falls under this category. America has a fear of losing its number one position, importance, dread, and control in the Asian region, etc.
Forcing someone to do something
The USA wants to put a tariff on India because it wants India to stop buying crude oil from Russia. The US thinks that India is fueling the Russia-Ukraine war. But Western countries and Western media are deliberately hiding the fact that they have directly provided weapons to Ukraine to sustain the war. Meaning, they want the war to continue, but they don’t want India to support the war (which India isn’t anyway supporting).
India has nothing to do with the Russia-Ukraine war; still, the USA wants India to pull into that. Somewhere, the deep agenda looks to break the friendship between Russia and India. This agenda is far from reaching the goal.
Trade Imbalances
When one country imports significantly more than its exports to another, it creates a trade deficit. A trade deficit occurs when your imports exceed your exports. Meaning the income is less than the spending. Countries may use tariffs to reduce imports and correct this imbalance.
Example: The US has long had a trade deficit with China. In response, it imposed tariffs on Chinese goods to encourage domestic production and reduce reliance on Chinese imports.
Protecting Domestic Industries
Governments may impose tariffs to shield local industries from foreign competition, especially if they believe those industries are vital to national security or economic stability.
Example: Tariffs on imported steel and aluminum are often justified as necessary to protect domestic manufacturing and defense capabilities.
Retaliation Against Unfair Trade Practices
Countries may accuse others of dumping (selling goods below market value), currency manipulation, or providing unfair subsidies. Tariffs become a tool of retaliation.
Example: If Country A believes Country B is subsidizing its solar panel industry unfairly, it might impose tariffs to level the playing field.
Political Leverage
Countries use tariffs as a bargaining chip in broader diplomatic negotiations. They’re not just economic tools—they’re strategic weapons. The government may use such bargaining for any reason it deems fit.
Example: A country might impose tariffs to pressure another into changing its environmental policies, labour standards, or intellectual property laws.
National Security Concerns
Sometimes, tariffs are justified on the grounds of national security. Such ‘security’ is often controversial, as it stretches the definition of what constitutes a security threat.
Example: The US has cited national security to justify tariffs on certain tech imports, fearing espionage or data breaches.
Real-World Example: The US–China Tariff War
One of the most prominent tariff wars in recent history was between the United States and China, beginning in 2018.
Timeline Highlights:
- 2018: The US imposed tariffs on $34 billion worth of Chinese goods, citing intellectual property theft and trade imbalance.
- China retaliated with tariffs on US agricultural products.
- Escalation: Both countries continued to raise tariffs, affecting hundreds of billions in trade.
- Impact: This tariff war fluctuated global markets, disrupted the supply chains, and caused businesses to face uncertainty.
Outcomes:
- Some domestic industries benefited from reduced competition.
- Others suffered due to higher input costs and reduced export opportunities.
- Consumers faced higher prices on everyday goods.
- Many lost their jobs in export-oriented businesses.
- Political ties deteriorated
Consequences of Tariff Wars
Please read my blog Effects of the ‘Tariff War’ on the USA Itself – PolyBlogger.com to understand the effects of the tariff war. Though this blog speaks about the impact on America, with little difference, the effects would be the same on every country.
Alternatives to Tariff Wars
Instead of escalating tariffs, countries can explore more constructive approaches:
- Negotiated Trade Agreements: Bilateral or multilateral deals that address grievances without resorting to economic warfare.
- World Trade Organisation (WTO) Mediation: A neutral platform for resolving trade disputes.
- Targeted Sanctions: Focused measures against specific entities rather than broad tariffs.
Conclusion: Navigating the Tariff Terrain
Tariff wars are a complex blend of economics, politics, and strategy. While they may seem like a show of strength, they often come at a high cost—especially for consumers and small businesses. In a world that thrives on interconnectedness, cooperation, and negotiation may offer more sustainable solutions than economic confrontation.
As global citizens, understanding tariff wars helps us grasp the forces shaping our economies and the prices we pay. Whether you’re a policymaker, entrepreneur, or curious learner, staying informed is the first step toward navigating this turbulent terrain.
Not sure if any ordinary person can avoid the tariff war, but the effects of a tariff war on the investments of an ordinary person are hard-hitting. So, be cautious when a trade war begins between your country and another country. Especially be careful when the trade between the countries is a significant portion of the total exports of your country.
While we may be liberal and accommodating in nature, international politics demand differently.
