TRADE WARS AND THE EFFECTS ON GLOBAL MARKETS
Since the end of World War II, the economies around the World have broadly operated in a
globalized market that helped deepening the World trade. The latter has exponentially grown,
producing an increase in production; in circulation of goods, information, people, and capital; and
in the development of a more efficient technology.
Since the 18th Century International trade has been considered the engine of growth, the
promoter of economic efficiency. In this period, Adam Smith used to argue that, since the division
of labour is very advantageous in production, free international trade is desirable as it promotes
international division of labour. In fact, it allows each country to become specialised in whichever
good is easier and cheaper for them to produce. In this way, free trade between countries
contributes to better allocate the productive resources of the World, leading to an increased
income of the trading countries (Law of absolute cost advantage for international trade).
Thanks to the globalization of the markets, economies around the World are strictly linked, making
Nations no longer self-sufficient.
Regarding these circumstances, how could the trade war between two big economic powers such
as the USA and China affect the rest of the World?
In general, a trade war between the US and China should concern other countries for many
reasons. For example, it can escalate to a fall in global trade, to a decreasing level of trust by both
consumers and investors and, consequently, to the lowering of consumption and investments.
This will lead to a drop in global economic growth. Furthermore, since the US and China are
dominant forces in the World economy, the effects would be significant. Of course, although the
effect on the demand of goods is insufficient to cause a recession, combining these factors with
others would. As a key example we can consider the Great depression of 1929. During this crisis
the US increased tariffs on some goods from other countries. This aggravated the already existing
deep economic crisis, that ended up leading to an even deeper worldwide economic crisis.
Moreover, bans on some goods, for example Trump’s veto of Huawei on national security grounds
that resulted in the impossibility for American companies (Google, in this case) to work with the
Chinese company, have direct consequences on users around the World. In fact, Google will not
be able to provide its Android services to Huawei, and if the largest seller of phones in Spain
cannot continue to offer these services, both will lose a large slice of the market and there will be
consequences for the Spanish consumers as well. In fact, the consumers would be the ones
suffering the most from this, because if they chose to still buy Huawei phones then they would be
excluded from the main search engine used in Europe and its services; but if they were to choose
not to buy Huawei’s products, they may be forced to spend more for a product of the same or
worse quality.
Furthermore, the increase of the tariffs on both the final product and the imported raw materials
and components could affect the final price of the products.
In fact, the increase of tariffs would make Chinese companies with suppliers in the US (or the
other way around), increase their costs. As written above, economies around the World are
strictly linked to each other, so this increase in tariffs and the consequent increase of the costs
between two powerful countries could, of course, affect the prices even in the rest of the World.
For example, if an Italian factory produces cars with the steel imported from China, but then the
US increases the tariffs on that same steel, this increase will also affect the Italian factory.
Another example would be the tariffs imposed by China on US-manufactured cars. These tariffs
will also have an impact on EU car manufacturers because some of them produce cars in the US.
In general, trade wars are likely to cause lower exports, reducing the profits of large multinationals
based in China and the US. This could cause a decrease of global investments. In fact, some
countries could lose inward investments from China and the US, leading to a lower economic
growth.
Trade wars can have a destabilizing effect on a given country’s economy, not only through the
raise of tariffs, but also through the investments in foreign public debt. For instance, China has
always invested in the US’ public debt. If China where to decide to stop buying these titles and, at
the same time, to sell them, it could potentially lead the US to bankruptcy.
The issue is that if the US collapses, the rest of the World, especially Europe, will collapse with it.
This would happen because, as already specified, global economics operate in a globalized market
shaped to some extent by the US economy, as the centre of all business activities. Because of that,
whatever economic situation will be developed in the US, its effects will hit the rest of the World
with even more strength, depending on the already existing situations in other countries.
Lastly, trade wars can affect geopolitical alliances. In fact, observing the Italian position in this
context, it is easy to understand that Italy finds itself between these two economic powers, the US
and China. Italy is an historical ally to the US, but at the same time has recently signed various
memorandums on the “New Silk Road” with China, launched by the Chinese President Xi Jinping in
2013. Italy has been the first country member of G7 to sign such a document, despite Washington
and Brussels’ doubts. In this kind of situation, in case of an escalation of the trade war between
the two economic powers, whatever side Italy was to choose it will inevitably affect its
international trade, because in both instances the Country will lose a big portion of the market,
but also, one of the two major investors in Italy’s public debt and economy.
In conclusion, trade wars jeopardize the stability of businesses and economies not only of the
countries in conflict, but indirectly also the rest of the World.
These wars backfire on the countries that decided to impose higher or new tariffs to each other,
because engaging in economic wars leads to hurting one’s own economy and undermining their
relationship with their own allies.
Furthermore, economic wars are symptoms of a tendency towards unilateralism. This change in
the economic international system will lead only to advantages in favour of the big economies
rather than the smaller ones, moving away from a multilateral economic international system
represented by the WTO, a forum where even smaller countries have the possibility to speak out
and everybody operates under the same set of rules.
REFERENCES:
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https://www.economicshelp.org/blog/148143/trade/how-does-us-china-trade-war-affectother-countries/
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https://www.mergerware.com/us-china-trade-war/
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https://samagame.com/en/this-is-how-the-trade-war-between-the-us-and-china-affectsthe-rest-of-the-world/
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https://www.internazionale.it/opinione/giuseppe-gabusi-2/2019/03/19/cinamemorandum-intesa-italia