Here are some answers to trade wars.

What are trade wars?

The term trade war refers to countries imposing tariffs or other trade limitations such as quotas or regulations on each other. A move by one country to punish another is then reciprocated by another country. The measures are often described as “tit for tat” –  one nation responds with an action that is more or less equal to the rule imposed by its peer. This was common around the Great Recession in the 1930s.

Why are we talking about trade wars?

The America First agenda of US President Donald Trump was not evident in over a year after assuming office but his announcement on a 25% tariff on steel and 10% on aluminum, both critical metals, put the topic back on the agenda. The threats of retaliation by the European Union and others kept the issue at the top. The moves by Trump are a sharp break from the trend in the past decades: fewer and fewer tariffs and other barriers, and more and more Free Trade Agreements (FTAs).

Are we at a full-scale trade war?

Not yet. While the tariffs on essential metals is a severe escalation, the exemptions for Canada, Mexico, and Australia and an open door for further exceptions somewhat take out the sting out of the announcement. Moreover, the US and other countries have imposed the occasional tariffs and enacted countermeasures via the WTO in the past. So far, these were the exceptions and not the norms. However, things may escalate.

What would trade wars do to the global economy?

Higher tariffs and barriers limit trade and thus lower potential economic growth and may even swirl the world into a global recession. The countries which have trade surpluses and are dependent on exports would suffer most. This includes China, other emerging markets in Asia, commodity exporters in Africa, and also Germany which has a high trade surplus.