What exactly a Trade War is and why it matters
In On War, Carl von Clausewitz teaches that war is an extension of politics by other means, as emphasized by a balance of power strategies. That's really what a trade war is — political gamesmanship. But that's not a very practical definition.
In more concrete terms, it's where trade-related policies have a negative effect on certain countries. Those countries then retaliate. Then, the original country retaliates, upping the ante. The escalation could, theoretically, go on forever until everyone hates them both.
A trade war doesn't necessarily happen just between geopolitical adversaries. The United States has sparked trade wars with its democratic, political allies. In 1983, the U.S. placed import tariffs and quota on specialty steel coming from Europe. It cost Europe two percent of its steel market share in the United States. Europeans demanded to be compensated. When that didn't happen, European markets imposed similar tariffs on chemicals and plastics.
Most of the trade wars involving the U.S. since 1980 were with Europe or Canada — only one was with an ideological rival, like China. In 1985, a quota on Chinese textiles resulted in China suspending agricultural imports from the U.S., a $600-million loss for American farmers.
China wasn't even as important a trading partner as they are today. Still, experts think the countries most likely to take the brunt of a Trump Steel Tariff are Brazil and Canada. And Canada has no qualms about retaliating. They did in 1993 as a result of duties on Canadian steel products.
As a matter of fact, the Ottawa Reporter already reported that Canada demanded an exemption and vowed retaliation.
So, this all sounds weirdly frightening, even though most of us reading this have no idea how it will actually affect our day-to-day. At worst, it could lead to another Great Depression. The Smoot-Hawley tariffs were protectionist duties that are said to have exacerbated the global economic downturn. Some even believe the looming threat of the tariffs caused the Depression itself.
More to the point, prices of certain goods related to the war will go up, especially if domestic producers of those products can't fill the demand.
For example, if aluminum manufacturers can't meet their needs with U.S. aluminum, products requiring aluminum will still need to be made, they'll just use the aluminum that costs 10 percent more. The cost will pass on to the consumer.
President Trump plans to implement a 25 percent tariff on foreign steel and 10 percent on aluminum.
Moreover, since the customer will be forced to pay a higher price for overseas steel and aluminum products, domestic producers will likely just raise their prices to meet the market price.
Here's the war part: other countries will slap tariffs on the $2.3 trillion worth of exports from the United States. Suddenly, American companies operating overseas are not as competitive in those markets as they once were.
China is the U.S.' largest debt holder (and owns as much as $1 trillion) and many other countries' desire to invest in purchasing U.S. debt keeps interest rates here relatively low. They may be less inclined to buy American debt in a trade war and that would drive up interest rates on domestic American purchases.
How does one win a trade war? The same way they win a real war: by not fighting it in the first place. The best outcome of all this trade war talk is that the countries involved re-evaluate their trade relationships in a way that prevents a financial battle.