What Is A 'Trade War'?

Among the many concerns engendered by the ascension of Donald Trump to the role of president of the world's largest economy is the issue of a potential "trade war," which is now being liberally splashed across media outlets with fear-laden emotion.

What does the phrase "trade war" mean? Which among the recent developments have served to precipitate fears of a trade war? What are its implications? How will it impact the other nations and domestic businesses, investors, employed professionals and the common man?

Benzinga strives to answer these questions below. Read on to get more clarity on trade wars.

Trade War: A Tiff Centered On Tariffs

Unlike the political wars history has taught us about, trade war is a tiff arising due to protectionists policies pursued by a nation. In retaliation to a tariff imposition or tariff increase by a nation in order to protect domestic industries, another nation raises tariffs on the instigator nation. A trade war is thus declared.

A trade war may be forced:

• When a nation perceives the trade practices of another country to be unfair.
• When domestic industries or trade unions lobby for imposition of tariffs on imports in orders to make imports less appealing to domestic consumers.
• When a government perceives free trade to be disruptive to the nation's progress.

Why The Fear Is Being Drummed Up Now

Trump has been vociferously espousing the cause of protectionism in a bid to "Make America Great Again." The "from this moment on, it's going to be America First" rhetoric repeated on the campaign trail and reeled out in his inauguration speech is ample evidence of which way the president is headed.

In keeping with his election campaign promise, Trump, as his first executive order, withdrew from the negotiations over the Trans-Pacific Partnership, a 12-nation agreement. The deal envisaged by former President Barack Obama would have boosted trade ties among 12 Pacific Rim nations accounting for roughly 40 percent of the global GDP. If the deal had fructified, it would have strengthened the United States' standing against China, as it involved partnership with a number of China's neighbors.

Also facing danger is NAFTA , which is an agreement among the United States, Canada and Mexico implemented way back in 1994. This agreement served to eliminate most of the tariffs on trade among these countries, allowing free flow of men, material and capital across borders. Trump sees this agreement as a bane affecting employment and investment in the United States.

He has already fired the first shots at NAFTA by issuing his Executive Order regarding the southern border wall and publicly floating the idea of a 20 percent Mexican import taxation.

Now to the biggest nemesis of the United States, according to Trump: China. Trump has taken exception to the deflated value of the Chinese yuan, saying the Chinese action of allowing its currency dropping like a rock has hurt U.S. businesses. If the U.S. Treasury brands China as a currency manipulator and declares a trade war with it, it could result in the United States. imposing tariffs of up to 45 percent on all Chinese imports into the States.

Implications Of Trade War

Exports make up a lion's share of a nation's economic activity. For the United States, trade accounts for roughly 13–14 percent of overall economic activity compared to roughly 36 percent for China. Any hit to exports has the potential to trip an economy into recession.

Apart from direct contributions to the economy, trade also supports jobs, which in turn fuel economic growth through consumption. According to data presented by the Office of the United States Trade Representative, for every billion dollars of goods and services, exports supported nearly an estimated 5,600 jobs in 2013. Thus, there is an indirect hit to the economy as well.

How A Trade War Will Affect Stakeholders

Understanding the impact through the potential trade war brewing between the United States and China, the impact is far reaching, affecting both countries at loggerheads, their people, industries and companies, among others.

Though China's reliance on the United States has diminished in recent times, it still depends on the United States for a significant portion of its export revenues. China reportedly exported $483 billion of goods and services to the United States in 2015 compared to $$116 billion worth exported by the United States to China.

Meanwhile, from the perspective of the United States, China is one of the major export destinations. Companies such as Apple Inc. AAPL and Boeing Co BA may see a dent to their revenues and profits if the country stops to transact business with China or ties between the two nations are strained.

Wal-Mart Stores Inc WMT and other such companies, which source cheap products from China, could see their products become expensive overnight, when the excessive tariffs are added onto the cost of the product.

Companies that have licensed technology to Chinese manufacturers may cease to get profits out of it.

Meanwhile, other nations may also be caught in the crossfire. According to a Forbes report, about 35 percent of China's exports of about $483 billion in 2015, was processing trade, with China importing components, assembling them domestically and exporting them to the United States. These imports — coming from countries such as Japan, Taiwan and South Korea — could be hit, impacting these economies as well.

With globalization getting entrenched into the economic fabric of the world, it goes without saying that a trade war affects the parties concerned enormously but also impacts other fringe players, given that the world has now become a global linkage, with several linkages and cross-linkages, forming a web.

Visit BZTeach for more awesome educational content!