What's a Trade War and How Do They Impact Consumers?

As of this writing, the United States has raised tariffs on Canadian steel and aluminum to 50%. This seems to be retaliation for Ontario, Canada placing a 25% tariff on energy exports into the United States, which was itself a response to the United States initial set of tariffs on Canadian imports. And by the time this article is published, who knows where these tariffs will stand. 

One thing, at least, seems certain: the Trump administration's use of heavy tariffs on foreign imports and exports seems to be pushing the United States into a trade war on multiple fronts.

So what exactly is a trade war? Let's take a high-level look at trade wars, specifically why they happen and what they mean for regular consumers.

What's a trade war?

The global economy is incredibly interconnected. We're all heavily reliant on goods and materials created and sourced from other countries. Even products we consider "Made in the USA" likely rely on some materials and resources that came from another country.

A trade war is when countries use economic barriers to deter the influx of goods or resources from another country. If Country A produces almonds, Country B might add a tariff on those almonds. This will likely reduce the amount of almonds sold in Country B, creating financial strain for Country A.

But of course, Country A is unlikely to take those almond tariffs lying down, and they may impose tariffs on cars being imported from Country B. 

Trade wars are typically defined by a cycle of retaliatory measures, placing increasing financial strain on multiple sectors. These measures may escalate until one or both sides back down.

Why do trade wars happen?

Trade wars usually happen when geopolitical disputes or economic policies spiral into a cycle of retaliation, but there are a variety of different reasons why things might start moving in that direction:

• Trade imbalances – If a country imports far more than it exports, its government may impose tariffs to reduce reliance on foreign goods and encourage domestic production.
• Protection of domestic industries – Governments may impose tariffs to protect domestic industries from foreign competition, often in response to claims of unfair trade practices (e.g., government subsidies to foreign companies).
• National security concerns – Some countries restrict trade in sensitive industries like technology, energy, or defense, citing security risks.
• Political disputes – Trade restrictions can be used as leverage in broader political disagreements, using financial pressure to negotiate deals in other areas.

Economic policy can be tricky to navigate and there are plenty of very legitimate reasons to slow or stop trade with a foreign nation, but every country is going to be motivated to look out for their own best interests, which is why these tactics can so often lead to a series of reprisals.

How do trade wars impact consumers?

In 1930, during the early stages of the Great Depression, Congress passed the Smoot-Hawley Tariff Act. The intent was simple: protect American farmers and manufacturers from foreign competition by raising tariffs on over 20,000 imported goods. The tariffs were some of the highest and most punitive in U.S. history.

The result? Things got much worse, very quickly.

Most major trade partners placed their own tariffs on American exports, ultimately cutting American exports by over 60% from 1929 to 1933. American industries that relied on exporting their goods, including farmers, were hit extremely hard.

The trade war caused by the Smoot-Hawley Tariff Act almost certainly made the Great Depression much worse, while also having a negative impact on the wider global economy.

All of which is to say: trade wars are rarely, if ever, positive for consumers. Among the expected outcomes of a trade war, you should expect:

• Higher prices
• Limited product availability
• Reduced job market
• Extreme market volatility

What can we do about it?

Leaving aside any potential political action, your best bet in the face of an uncertain economic future is always to put yourself in the best possible position to manage major, unexpected changes.

• Focus on building your savings
• Clear away unsecured debt quickly to avoid interest payments
• Reduce spending where able
• Diversify your skill set

What you shouldn't do is stress out about things you can't control. Try to keep your worrying focused on things in your immediate line of sight. And if you need help sorting out your finances or creating a plan to get out of debt and start building savings, MMI offers free credit counseling 24/7, online and over the phone.