If a nation unilaterally raises tariffs against imports from another country (or group of countries), they can refer the matter to the World Trade Organisation for binding arbitration and/or they can retaliate against the first country by raising their own tariffs on the goods they import from them. Tariffs on imported goods mean that they become more expensive (and less competitive) in the importing nation. This should erode the competitive advantage of the imported goods, giving a boost to comparable local products (or those from a third nation). However, if domestic customers want the specific product, they are forced to pay more for it (i.e. US consumers pay tariffs on imported goods; not the exporting nation).
President Trump has claimed: “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!”
The reality is not likely to match his assertion. Whilst many in the USA and the rest of the world have accused China of currency manipulation and unfair trading practices, the reality is that they want access to Chinese markets for high value goods. China could turn to other markets to satisfy its needs if the US is belligerent.
As a response to US tariffs, China has announced that it will apply tariffs on a range of US imports of up to 25% which is set to affect $3 billion worth of US goods. The initial targets will by US scarp aluminium imports, rolled steel, fresh and dried fruit, nuts ginseng and wine and frozen pork, set at 25 (Al) and 15%, respectively. The USA is set to up the ante on this with further tariffs against Chinese imports worth tens of billions of Dollars.
Stock markets are likely to react negatively to a trade war which could easily escalate and drag in other nations. It has long been received economic wisdom that tariffs represent a drag on international trade (hence the Brexiters’ fixation on free-trade agreements), but they are not the only barrier to trade in a complex and increasing regulated trading world.