Trade wars, Trump tariffs and protectionism explained

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Donald Trump and staff in the White HouseImage copyright
AFP/Getty

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President Trump announced tariffs on $60bn worth of Chinese imports – but what does that mean?

Stock markets are tumbling and economists are edgy as talk of a trade war dominates the news.

China is now hitting back against planned US tariffs, saying it is “absolutely not afraid” of the consequences.

This puts the world’s two largest economies at each other’s throats.

But what is a trade war? How does protectionism work? And how will it all affect you?

What is a trade war?

It’s what it sounds like – a trade war is when countries try to attack each other’s trade with tariffs and quotas.

One country will raise tariffs, causing the other to respond, in a tit-for-tat escalation.

This can hurt other nations’ economies and lead to rising political tensions between them.

US President Donald Trump reckons trade wars are “good” and easy. He’s not afraid to raise tariffs.

But what is a tariff?

It’s a tax on a product made abroad.

In theory, taxing items coming into the country means people are less likely to buy them as they become more expensive.

The intention is that they buy cheaper local products instead – boosting your country’s economy.

Why is Trump doing this?

The president put tariffs on $60bn worth of Chinese goods, in part because of alleged Chinese theft of intellectual property – which means design and product ideas.

The White House said it has a list of more than 1,000 products that could be targeted by tariffs of 25%.

Companies will get a chance to comment before they are put into effect.

Mr Trump wants to cut the trade deficit with China – a country he has accused of unfair trade practices since before he become president.

What’s a trade deficit?

It’s a term meaning the difference between how much your country buys from another country, compared with how much you sell to that country.

And the US has a massive trade deficit with China.

Last year, it stood at about $375bn. Mr Trump’s not happy about that.

He wants to cut back this trade deficit, and he intends to use tariffs to do it.

Critics are damning the moves as protectionism.

What’s protectionism?

Protectionism is trying to use tariffs to boost your country’s industry, and shield it from foreign competition.

Take Mr Trump’s steel and aluminium tariffs.

At the start of March, before his latest moves against China, the president announced a 25% tariff on all steel imports, and 10% on aluminium.

The Trump administration claims the US relies too much on other countries for its metals, and that it couldn’t make enough weapons or vehicles using its own industry if a war broke out.

Critics point out the US gets most of its steel from Canada and the EU – staunch US allies.

In theory, taxing foreign steel and aluminium will mean US companies will buy local steel instead.

The thinking is that will boost the US steel and aluminium industries, as more companies will want to buy their goods.

Steel and aluminium prices will go up in the US because there will be less of these goods coming in from abroad – so the greater demand for local steel will push up the price, lifting profits for steel makers.

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Getty Images

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The number of people employed in the US steel industry fell by almost 50,000 between 2000 and 2016

But does it work?

Sort of.

US steel makers could get a boost – demand will drive new hires and bigger profits.

But the US companies that need raw materials, like car and aeroplane makers, will see their costs rise.

That means they might have to put up the prices on their finished products. That would hurt consumers.

So car prices could go up in the US. As could prices for gadgets, plane tickets and even beer – the price of making a can could rise.

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Reuters

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Making beer cans could become more pricey – and that cost could be pushed onto consumers

How could tariffs affect me?

They could affect people around the world – especially since China is retaliating.

The world’s second-largest economy is planning to tax US agricultural and industrial products, from soybeans, pork and cotton to aeroplanes, cars and steel pipes.

In theory, China could also tax US tech companies like Apple. That would hit the tech giant, and it could be forced to raise its prices to compensate.

While the EU is exempt from the new steel tariffs, as are Argentina, Australia, Brazil, Canada, Mexico and South Korea, a global trade war could hurt consumers around the world by making it harder for all companies to operate, forcing them to push higher prices onto their customers.

Is free trade better then?

Depends who you ask.

Free trade is the opposite of protectionism – it means as few tariffs as possible, giving people the freedom to buy cheaper or better-made products from anywhere in the world.

This is great for companies trying to cut costs, and that’s helped drive prices down and boost the world economy.

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Reuters

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Free trade has led to a vast expansion of shipping and transfer of goods around the world

Cars, smart phones, food, flowers – free trade has brought affordable products from around the world to your home.

But at the same time, that means companies are less likely to buy local products. Why buy domestic when you can get more, cheaper, from a different country?

This means the loss of jobs in wealthier countries, and uneven growth – while free trade has made some people richer, it’s made others poorer.

How is it all going to end?

No idea.

Historians have pointed out that tariffs often lead to higher costs for the consumer, while economists across the board are against the plans.

The Republican Party is also overwhelmingly against Mr Trump on tariffs – they’re big supporters of free trade.

Mr Trump’s decision to take on China could lead to adverse effects for consumers in the US and in China, but also worldwide.

An economic showdown between the world’s biggest economies doesn’t look good for anyone.





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