A retaliation game played by two countries who tax each other for their imports is called a ‘trade war’. In economic theory, trade wars are side effects of protectionism: government actions and policies to restrict certain trade to help boost the local economy and businesses.
China and America have been in a trade war for a long time and it intensified with the election of President Donald J. Trump. President Trump thinks China has been taxing American imports unfairly and retaliated by imposing new taxes on Chinese imports.
Was China actually being unfair with their approach to tariffs? An investigation was conducted on China’s intellectual property policies which ended by starting a new trade war.
This trade war is a side effect of President Trump’s ‘America First’ policies. How would this benefit Americans?
In theory, the price of imported products will go up making the consumers start buying American goods. That means, ‘Buy American, Hire American’. We don’t know for sure if the theory can be backed with data.
While the demand increases, the market may struggle with lower choices and can cause inflation. The protectionist approach can also slow the world economy and cultural exchange.
The chief economist for International Monetary Fund Maurice Obstfeld says, “Trade policy reflects politics and politics remain unsettled in several countries, posing further risks”. The IMF forecast for 2018 and 2019 has reduced the world economic growth from 3.9% to 3.7%.
There is also a warning about the crisis of free trade from WTO Director-General Roberto Azevêdo. On the upcoming G20 summit (June 28, 2019), he says, “Multilateral system should be on top of the agenda in many places”.
More or less, a reform of the World Trade Organization policies on trade is needed to reduce conflicts and advance the world economy.