What is a trade war?
The dictionary defines it as “a hostile situation in which nations attempt to damage each other’s trade.” Basically, Country A imposes or raises tariffs (which are taxes on imports) on Country B and Country B reacts by also raising and imposing tariffs on Country A, and so on…
Why are we even talking about a trade war?
This past weekend, President Trump announced plans to impose a 25% tariff on all steel imports and a 10% tariff on aluminum imports. That is, steel and aluminum coming from foreign countries will cost way more than those being produced in the US.
The White House justified such plan by claiming that the steel and aluminum production worldwide is currently having an impact on US’ national security. There is a law that allows the government to block certain foreign imports in order to make sure that the US would be able to have or produce enough of them in the event of war.
The question we really have to answer, however, is: Are these tariffs really motivated by national security concerns or, instead, are they motivated by a political desire to protect the American steel industry? The law used by the White House to justify these tariffs would only permit the former.
For a long time, Trump has claimed he favors protectionist policies that favor American companies and harm foreign competition. The “America First” argument is that we need to impose these tariffs in order to protect American companies and jobs that have been threatened by globalization.
Who would benefit from these tariffs?
American steel and aluminum companies will benefit from these tariffs. Goldman Sachs claims that Russia and China would also benefit, as the US would become less competitive in the international market.
Who would be hurt by these steel and aluminum tariffs?
These tariffs would hurt American companies that rely on steel imports. That might be why the stock market went down after the White House’s announcement. They would also hurt US allies, like Germany and Canada, which export steel and aluminum to the United States.
American allies are pretty upset about this announcement. They have promised to retaliate, which is exactly how a trade war happens. The European Union could impose tariffs on American goods, such as bourbon, peanut butter, cranberries, orange juice, steel, and other products.
Hence, many American companies could be hurt if other countries impose high tariffs on their products – which could potentially lead to American workers losing their jobs.
Yesterday, Gary Cohn, Trump’s top economic adviser and former Goldman Sachs president, resigned over this issue. He deeply believes in free trade and argues that these tariffs will start a trade war that could end up damaging the US economy.
We now have to wait for the President to make a formal announcement and give more details about how the tariffs would work.