Reference no: EM133194790

Why Countries Engage In 'Trade Wars'

Learning Objective: Recognizing how trade agreements and treaties facilitate international trade

Identify why countries engage in trade wars

Recognizing how trade treaties facilitate a country's domestic and international agenda.

Overview of the Law
Countries engage in trade with one another for economic benefit. The trade can be an exchange for goods and services. Commercial activities are conducted by individuals, companies and government agencies. As trade between countries increase, the trade is formalized into trade agreements and/or treaties. Treaties and trade agreements are essentially contracts that regulate the flow of goods and services in certain directions. They determine who gets to benefit from the trade. However, unlike contracts that are enforceable in a court of law, there may be no higher entity that can enforce treaties and trade agreements. Many countries object to a higher body or agency outside of its jurisdiction that can tell the people in a certain country what it can and cannot do. Many international agencies, like the United Nations, the International Monetary Fund, the World Trade Organization, and the World Health Organization, are run by consensus subject to the whelms of a few powerful countries. Countries, like human beings, will do what they want to do when it benefits their interests.
Countries will assert the consensus of the collective body (of nations) when it suits their purpose, but will argue that the rule infringes on its' sovereignty when it doesn't. The United States for example will tout the WTO when the organization supports its position against the European Union on trade issues but will reject the WTO's rulings when the international trade body rules in favor of China on other trade issues.

Sometimes, when a country feels there is an imbalance in the trade exchange in a particular area, it will try to remedy this by imposing tariffs and/or quotas on imports. The imbalance can be real or perceived, it can be due to internal political pressure from special interest groups, or it can be part of the country's broader policy for international engagements. Certain business interests who wish to maintain the status quo or who wish to change the status quo with another country, will lobby their governments to force the other side to change its behavior for their benefit.

A trade war occurs when one country acts against another country by raising import tariffs or placing other restrictions on the other country's imports. The justification will be coated in words such as fair, not fair, government subsidies, free trade, rule of law, etc., in an attempt to paint the other country as the source of the problems.

Trade wars are not necessarily about balancing trade. The United States has a trade imbalance with China amounting to several hundreds of billions of dollars. The exchange appears imbalance on its face when you just look at the numbers. What has been deliberately left out of the equation by the politicians is that the US currency serves as the reserve currency for the rest of the world. This means that other countries will hold onto US Dollars instead of exchanging them immediately for other goods and services because they have to pay for other goods and services that they buy from other countries using US Dollars.

In the case of China, this trade imbalance includes payments made to US companies for its intellectual property rights. As an illustration (the numbers are not correct): if an iPhone sells for $800 and its' manufacturing cost in China is say $110, the entire $800 is attributed to China as part of the trade imbalance. What the calculation fails to take into consideration is that there is another $400-%500 in IP that Apple receives for licensing its IP towards the manufacture of the iPhone. Apple, an American company, receives this money, not China.

The trade imbalance doesn't take into account the high costs of low prices for the American consumers. To get the price point of an iPhone that is acceptable to the American consumer, someone has to pay for the difference. This is why multinational companies move their manufacturing operations to lower costs countries where the labor is cheaper, there are less labor rules, less environmental controls, and the like.

Trade wars are about using a country's economic might to get what it wants in response to social, economic or political pressure from within or without. Depending on the relative strengths of the two countries to inflict economic pain on each other and their political will to endure the economic pain, the results of the trade war(s) can have long term lingering effect.