by Johanna-Barbara Gruber

History displays trade wars as instruments that show disapproval with existing economic or political systems. Some, like the Boston Tea Party or the infamous Opium Wars, led to armed conflicts, whereas mutually elaborated solutions could conclude others like the Chicken Friction or the Pasta Spat between the US and European countries.

In a world which aspires to trade between countries all over the globe, several tools may help to support the vision of the reduction of trade barriers. The waiver of tariffs, quotas or subsidies on goods and services are well known as instruments to eliminate discrimination on both imports and exports. However, what if those capabilities are used to obstruct the development of a global trade area? Economic instruments such as economic sanctions have proved to be more than a political statement or foreign policy within the past years. It is now time to reflect on several appropriate sanctions enforced in the last few months and give an outlook on how creating trade barriers does not only influence global competitiveness but may also be an indication of political disagreement. 

Protectionism is the main reason why global trade is harmed. This is the country’s desire to shield its domestic industries from foreign competition by charging taxes on foreign goods and services. In theory, a country could, therefore, hit an industry or specific company so dramatically, that they have to compensate their potential losses by raising prices. Speaking of higher prices for customers, it can be said that a trade war may affect everybody, even at the lowest level. As soon as manufacturers and producers pay more for intermediate products, commodities and equipment from foreign markets, import costs will increase, and the nation’s real GDP growth will be affected. 

However, why do governments decide to create trade barriers for other countries and what are their arguments for them? The answer is pretty straightforward. It is all about competitive advantage at first sight. The world economy experienced a rupture of several trade relations, due to political disagreement and the desperate attempt of countries to strengthen their economic competitiveness. Trade protectionism occurs through government intervention. Political arguments to defend extreme sanctions among foreigners are the protection of jobs and industries. A nation may believe that without trade protectionism a nation could lose not only long-established companies that first made a product in the particular nation but entire industries in general. Therefore, it is likely that quotas will be used to regulate the number of goods and services that may be imported. In theory, it makes sense to protect the domestic industries, but current examples show that in a case of extreme protectionism, third parties can be harmed even more. After the US had charged sanctions on Iran, several German companies suspended their operations in the country. Their trade volume with the US is worth over 35 times more than with Iran, which may not justify further investment in the East, as long as the manufacturing costs are expected to rise. Consequently, companies try to resettle the location of their industries, which may result in a decrease of the foreign countries’ GDP. 

Trade wars themselves usually result from extreme protectionism, occurring when a government decides to charge quotas or tariffs on foreign nations to shield their domestic market. In case of clearly unfounded sanctions, the charged country may retaliate with an even harder trade bloc. These actions are likely to escalate, in case negotiations between the governments lead nowhere. What once started as an act of protecting the domestic market, has now resulted in a potential political discord between two nations. 

In the past few months, several sanctions have been used to demonstrate political and economic disagreement between the US and countries like Iran, China and the European Union. After the US had resigned from the nuclear deal, which had been made in 2015 between Iran, France, Great Britain, Germany, Russia and China, the US started to charge sanctions on Iran. The world economy reacted instantly and not only by spiking the price of oil, but by the stock exchange value decreasing. While the economic consequences were immediately visible, the tension behind the sanctions was more revealing. The US tried to show their disagreement with Iran’s behaviour regarding the nuclear deal in the past, reproaching them not having followed the conditions correctly. This is a perfect example of economic sanctions being used to show political disagreement. 

In light of the examples and explanations given, the main question is why do countries prefer to lose a trade relationship with other nations, in order to benefit temporarily from the effects of protectionism, eventually. The future will show whether the interventions of big global players may help to stop the ongoing creation of trade barriers all over the world. 

20 September 2018
This text was published in Bullseye issue 73