Since the end of WWII, nations that have opened up their markets to free trade have become richer. Unfortunately, many people still oppose free trade and believe that tariffs are the best way to support their national economic interest. Unfortunately, tariffs almost always lead to trade wars between countries. This article shows why nobody wins in a trade war.
Not all wars have a winning side. For example, in a trade war, everyone loses.
That’s because each side becomes poorer, as decreased trade results in lower levels of economic output. Despite the evidence that shows free trade makes everyone better off, many people still oppose it.
Many times when a nation accuses another trading partner of unfair trade practices, there is often a knee-jerk reaction for the country to remedy the situation by slapping tariffs on the (perceived) offending party. Unfortunately, the duties don’t work for several reasons, and everyone ends up losing in a trade war.
The French economist Frederic Bastiat once said, “When goods don’t cross borders, soldiers will.” In other words, when countries share a common economic interest such as trading, they have no reason to go to war, which would be too costly.
However, if they stop trading with each other, there is a greater chance that they will go to war to regain the resources lost by no longer trading. Therefore, if countries want to avoid armed conflicts, they should build strong economic ties with each other through free trade.
That way the economic gains made from trading will incentivize both countries to avoid war at all costs.
Even when trade wars don’t lead to conflict, they still create a lot of (unexpected) casualties, the first of which is the consumer, who must pay higher prices when they purchase imported products. However, even if they buy goods produced in their home country, there is still a good chance that some of the raw materials used to create those goods are imports.
That means non-imported products could cost more as well. When consumers have to pay more for the goods they buy, they have less money to spend on other items. Therefore, most consumers will have to make spending cutbacks, which will eventually hurt the economy.
Declining consumer spending creates another casualty in a trade war — the business community. Business spending drives economic growth and opportunities for everyone else in society. However, when companies see their profits decline from a reduction in consumer spending, they must make cutbacks to survive.
Employment is one of the first things that businesses cut during an economic downturn. (Unemployed workers are yet another casualty of a trade war). Unfortunately, a rising unemployment rate further hurts consumer sentiment and spending.
Furthermore, rising unemployment also signals that worse economic conditions are ahead, which leads consumers and businesses to make further spending cuts. That can create a vicious cycle that produces a deep financial crisis like the Great Recession from 2007-09.
Another casualty of a trade war (and a resulting economic downturn) is tax revenue at all levels of government (federal, state, and local). When the economy suffers, governments collect less in tax revenue. That’s because a reduction in economic activities means that (most) businesses and workers are earning less money; therefore, they owe less in taxes.
Fewer tax receipts indicate that governments have to cut spending (which hurts those most in need), borrow more money, or raise taxes (which further hurts economic growth). None of those options are desirable during a recession, and they often make economic downturns worse.
Finally, everyone in society ends up becoming a victim of a trade war. A trade war often stirs up emotions, like nationalism, which unfortunately can cause people to turn against those who are different and lead to more bad feelings and mistrust in society. When people fight among themselves, they are less likely to work together on solving critical issues that would benefit everyone. Distrust also leads to pessimism and more misery.
In short, trade wars end up hurting everyone in society. When nations don’t have strong trading partnerships, they are more likely to settle disputes with war. Placing tariffs on imports forces businesses to raise their prices.
That means consumers get stuck paying more for goods (which leaves them with less money to spend elsewhere in the economy). Less consumer spending cuts into business profits. Lower profits mean that companies have to cut workers.
A declining economy also means that governments have less tax revenue to spend on their citizens.
Lastly, a trade war makes people turn on each other – as well as feel worse about their life – due to diminished economic opportunities.
Why Nobody Wins in a Trade War
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