Trade Wars: What They Are and Why They Matter

An economic conflict arises when countries attempt to challenge or eliminate another nation’s dominance in international trade or market share. It may also occur when financial pressure is used to achieve political objectives. Major economies or arch-rivals start a “trade war,” turning it into a headline story on every TV channel and newspaper. Countries can spark economic conflict by imposing barriers such as tariffs, quotas, subsidies, or import bans in retaliation for actions like currency manipulation, intellectual property theft, or protecting domestic industries. In some cases, they escalate the situation by enforcing sanctions.

These trade confrontations are often introduced to achieve the following objectives:

• Preventing competition against domestic industries
• Trade imbalances
• Unfair trade practices
• Breaking trade hegemony
• Political gains

How Trade Wars Start, And Why They Escalate?

Trigger

A root cause that sparks the conflict, as a result, is that the aggrieved country initiates tariffs, quotas, or trade restrictions on specific goods or sectors to protect its domestic industries.

Retaliation

The targeted country responds with tit-for-tat by imposing its trade barriers or by restricting other nationals from business in its country. It signals the beginning of a trade war.

Escalation

In an escalation, countries tend to raise tariffs on a single industry, expand the scope of restrictions by involving more industries, or go for non-tariff measures, including subsidies or a complete ban.

Economic Impact

The trade war between the market’s big stakeholders shadows global markets, and even third parties may also be impacted. Tariff war directly affects supply chains, raises consumer prices, may cause inflation, and, in the worst situation, it may strain diplomatic relations.

Negotiation

Countries usually go for negotiations after assessing the mutual harm or after being insisted upon by other affected parties. Countries may pursue bilateral or multilateral talks, often led by trade bodies like the World Trade Organization (WTO). Alternatively, they may turn to alternative dispute resolution methods to achieve a long-term solution.

Resolution

Either instigated by trade bodies or affected parties, a truce or a new trade deal is signed. Mediation and arbitration have always played a historical role in resolving disputes, facilitating relations, and reaching an agreement. As a result, countries may reduce or lift tariffs and establish a new framework for cooperation or compliance under the new agreement.

The Real Reasons Behind Trade Wars, Beyond Just Tariffs

Understanding of trade war is attributed to a question that every negotiator, mediator, or arbitrator explores:

How does a trade war begin?

Trade war does not appear at once, but policies or intact fears steadily shape the commercial relationship between trade rivals. This question may be answered in the following sparks/triggers of trade confrontation:

Key Reasons Behind Trade Wars:

Large Trade Deficits

The imbalance of imports and exports plays a significant role in any country’s trade policy. On the one hand, heavy imports deplete a country’s foreign reserves; in addition, they can also expose the importing country to economic threats. In such a scenario, trade adversaries opt to correct the imbalance through tariffs or quotas.

Intellectual Property (IP) Theft

Stolen technology, counterfeiting, or hegemonic influence often sparks trade disputes, particularly in high-tech and pharmaceutical sectors. Forced technology transfers and cyber espionage were major triggers of the U.S.–China trade war in the last decade. Cases like Micron vs Fujian and 2018 Jinhua highlighted concerns over stolen tech. It led to a complete confrontational trade war affecting global supply chains and increasing scrutiny of IP laws.

Unfair Subsidies

States often subsidy local products and manufacturers to encourage self-dependency and cheaper products. Supporting domestic industries may affect foreign investors and distort global competition. So, unfair subsidies to domestic companies lessen the market share of foreign companies.

Dumping of Goods

It refers to the practice of exporting goods at a very low price, lower than their normal price, even below the value of cost. Countries use these tactics to weaken competitors, gain market share, or dispose of excess inventory.

Restrictions on Market Access

The aggrieved country’s investments may face policies such as import quotas and licensing requirements targeting specific sectors. In response, the aggrieved country often retaliates with similar measures.

National Security Concerns

Limiting imports or investments in strategic sectors like defence, telecommunications, mining, or energy to protect critical infrastructures may lead to retaliatory actions.

Currency Manipulation

To gain an unfair trade advantage, a country deliberately devalues or influences exchange rates. In such a scenario, exports become cheaper and competitive in foreign markets, and imports become costly to urge people to buy domestic goods.

Trade Protectionism and Populism

Governments follow protectionist policies to protect domestic industries to appeal to voters or workers, even at the cost of international cooperation.

Violation of International Trade Agreements and Standards

Globally accepted trade norms, bilateral or multilateral trade agreements, are recognized by international law and are enforceable. Violation of WTO rules and bilateral trade agreements may be retaliated against by another country with trade restrictions or complaints.

A Brief History of Trade Wars: From the 17th Century to Today

Trade wars have long been a strategic tool that was steered by nations or city-states of Italy to protect their domestic industries, to blackmail rivals, or to dominate global markets. The stages or forms of trade war have been different each time. In the 17th century, England introduced the Navigation Act to restrict colonies to trade with England only with English ships, with the purpose of English merchants’ domination in the sea and hegemony in colonies in the shipping sector. It caused the Anglo-Dutch Wars, as the Dutch were then the dominant trading nation. 

In the 18th and 19th centuries, following the Industrial Revolution, protectionism and mercantilism influenced global trade. To protect local manufacturing, countries imposed high tariffs on their imports. For example, the Corn Law of Britain, which imposed high tariffs on the import of grain, sparked political conflict and was then repealed in 1846.

The most infamous trade war during the great depression led to the creation of multilateral trade institutions like the GATT (General Agreement on Tariffs and Trade) to regulate global trade. Later, the WTO (World Trade Organization) replaced it as the primary institution. The causes are related to the United States Smoot-Hawley Act of 1930, which raised import duties on more than 20,000 goods. This sparked retaliatory tariffs from Canada, France, and others, leading to a collapse in global trade and worsening the economic crisis.

Concerns over trade imbalances, IP theft, forced technology transfer, and state subsidies in China sparked the most significant trade war between the United States and China. The White House imposed tariffs on Chinese goods worth billions of dollars. China also responded with tariffs, affecting American agriculture, technology, and manufacturing. It impacted global supply chains and financial markets and forced companies to vary the range of their production.

Economic wars illustrate how trade policies can quickly escalate to a geopolitical conflict and threaten global economic stability.

The Global Ripple Effect: How Trade Wars Impact Everyone

The results of the tariff war depend on the intention of the country to impose tariffs. If it is to protect domestic industries, then it can encourage consumers to buy local goods, stimulate domestic industry growth, and significantly reduce the trade deficit. Countries can use it as a strategic tool to pressure others into changing unfair trade practices, such as intellectual property theft and currency manipulation. If an imposing country is more reliant on imports of goods for daily life, then a trade war can boost prices and make life more costly.

Moreover, exporters face real damage caused by tariffs as they may reduce their global demand and cause instability in international markets. Supply chains in industries like electronics, automotive, and agriculture can be disrupted, leading to production delays and losses. In addition, the uncertainty caused by the trade war has long-term consequences, more likely to affect foreign investment.

One of the global effects of the trade war is a reduction in the overall volume of international trade. A notable example of a trade war between the United States and China not only shocked both economies but also shook the global market and countries reliant on trade with either power. In the long run, while trade wars may achieve certain policy goals, they often lead to more harm than good for the interconnected global economy.

US vs. China: Can the World’s Two Largest Economies Survive a Trade War?

China, the world’s second-largest economy, sustains substantial economic power and resilience, which enables it to challenge the United States in a financial tug-of-war. China, by utilizing its skilled population, erected a large-scale manufacturing base, and a growing middle class and strong state control allowed it to shift policy in response to external pressure quickly. The U.S. owes trillions of dollars to China in the form of Treasury bonds. At the same time, China maintains a diverse global trading network, giving it both leverage and access to alternative markets. China’s strategic initiatives, like the Belt and Road Initiative (BRI), further deepen its global economic influence.

However, fighting against the U.S. comes with serious limitations. These include technological superiority, global alliances, and a strong consumer market that Chinese exporters rely on. Additionally, the trade war may shake the confidence of China’s investors and slow down its growth. It could also force multinational companies to relocate away from China.

Key Challenges for China:

Economic Impact:

• The trade war is causing significant economic pain for China, affecting its exports and industries reliant on global trade.
• Retaliatory tariffs may hurt domestic businesses and consumers by increasing costs and reducing competitiveness.

Diplomatic Isolation:

• China’s aggressive stance could narrow the window for a diplomatic resolution, leaving it vulnerable to prolonged economic conflict.
• The trade war risks alienating allies or neutral countries that may side with the U.S. due to shared concerns about China’s economic practices.

Geopolitical Pressures:

• The trade war is intertwined with broader geopolitical tensions, including regional security concerns in Asia-Pacific.
• China’s strained relations with neighbouring countries (e.g., India and Japan) could complicate its ability to rally support against the U.S.

Dependence on Global Markets:

• As a major exporter, China’s economy heavily relies on international markets, particularly the U.S., making it susceptible to disruptions caused by tariffs and trade barriers.

Key challenges the United States faces in a trade war:

Higher Costs for Consumers and Businesses

Tariffs directly affect the prices and the importer’s businesses that rely on foreign materials. Higher prices and increasing costs are the consequent results of the trade war experienced by American citizens.

Retaliation Against U.S. Exports

Tariffs imposed by the United States only affect imports, damaging the exporters of other countries. However, in the case of retaliatory tariffs, usually on agriculture, automobiles, and technology, a tariff war can also hurt American exporters and farmers.

Supply Chain Disruptions

Trade war disrupts sourcing and production timelines and increases operational costs. And many U.S. companies rely heavily on global supply chains.

Economy Slowdown

Besides higher prices and increasing costs of raw materials imported, trade conflict can drop GDP growth, impede foreign investment, and cause uncertainty in financial markets. So, American markets may suffer more than Chinese.

Strained Alliances and Global Leadership

Aggressive policies may annoy close allies and weaken U.S. leadership in global economic institutions like the WTO.

Limited Impact on Trade Deficits

Despite tariffs, trade deficits often persist due to broader economic factors like consumption demand, national savings rates, and the strong position of the U.S. dollar.

Role of Alternative Dispute Resolution (ADR) in Trade War

The best alternative to trade wars, protectionist policies, hurting businesses, and making individuals’ lives more costly is a properly structured dialogue between the contestants. This approach encourages constructive communication rather than escalating conflict. In this context, Alternative Dispute Resolution (ADR) serves as a globally recognized method to promote dialogue. ADR plays a comprehensive role in fostering peace, facilitating commercial settlements, and resolving civil disputes by finding mutually acceptable solutions.In a trade war scenario, ADR methods such as mediation, negotiation, and arbitration come with key prerequisites. These include dialogue, self-determination, flexibility, confidentiality, impartiality, and a voluntary process. These elements make ADR highly effective in resolving conflicts by promoting collaboration and mutual understanding.

Continuity of tariffs and retaliation may broaden the conflict to other measures like boycotts, sanctions, and trade embargoes. Countries can use ADR offices to initiate dialogue and address misunderstandings and grievances. This allows them to explore mutually agreed-upon solutions without damaging broader economic relationships. ADR offers a less confrontational, faster, long-term, and flexible way to settle disputes compared to traditional diplomacy, back-door channels, and theories of power. 

One of the ADR methods, mediation, helps parties reach temporary agreements and establish a foundation for future disputes or long-term trade treaties. Mediation encompasses dialogue, effective communication, breaking the silence, and understanding the positions, needs, and interests of the parties involved. It also includes structured negotiations to facilitate resolution. Institutions like the World Trade Organization (WTO) encourage the use of ADR through their Dispute Settlement Body (DSB) to prevent conflicts from escalating.

A mediator plays the role of a neutral party who helps parties communicate effectively, brainstorm options, and find the most workable solution. Whether in commercial or civil conflict, the mediator facilitates the process of resolution. Institutions like the UNO, WTO, or others respected by both countries may offer the role of mediation.

A mediator, acting as a negotiator, steers the process with a focus on the desired outcome. They work to achieve a balanced agreement that ends or softens the conflict. In trade wars, a skillful mediator first evaluates the key actors involved in the conflict. They then analyze the causes and effects while uncovering hidden facts and figures related to the dispute. Afterwards, the mediator decides which style of mediation suits the situation, either facilitative, evaluative, or transformative. After identifying every aspect of the conflict, the mediator uses negotiation skills to facilitate communication. These skills help transform the relationship between the rivals.

In trade wars, a mediator with negotiation skills can transform prolonged tariff battles into formal trade agreements. This process may also lead to the temporary withdrawal of tariffs, restoring trust and stability to international trade relations.

On the other hand, arbitration, a designed neutral process, has expertise in resolving disputes originating from Bilateral Investment Treaties (BITs). Arbitration provides a formal, neutral, and binding method where experts in the field are designated to resolve disputes between a foreign investor and a host country. These experts help ensure a fair resolution to the conflict. Most bilateral investment treaties (BITs) embed arbitration clauses to protect investors in case of a treaty violation. These clauses ensure that investors have a mechanism for resolving disputes. 

In arbitration, the parties resolve disputes based on their contract or agreement to arbitrate, which outlines the arbitrator, applicable laws, and the venue of arbitration. These terms guide the entire arbitration process. Many international institutions, such as the ICSID (International Centre for Settlement of Investment Disputes), offer arbitration in matters of investment. The London Court of International Arbitration (LCIA) and the International Chamber of Commerce (ICC) also provide arbitration services. These institutions handle disputes related to intellectual property theft and breaches of international trade contracts.

Alternative Dispute Resolution directs efforts to a more systematic and structured pathway to resolution while preserving relationships and sustaining stability in a global village.

Haider Zia Kainth (Author) is a legal strategist and partner at Neutral’s Law, specializing in contract law, intellectual property, and alternative dispute resolution. His expertise in arbitration and mediation empowers businesses to overcome legal challenges and foster effective resolutions in a dynamic global marketplace.