For many people, “money is the engine that drives the world.” And, although we do not agree with that phrase as a philosophy of life, definitely, the economy is essential for the progress of a country. More in a globalized and interconnected world, in which trade relations between countries are increasingly numerous and necessary. Therefore, it is assumed that the commercial relationships that are established must be beneficial for the countries involved.
However, that benefit remains until The balance is broken, when one of the countries, to protect its economy, establishes import barriers. Affected countries may respond in the same way, thereby enabling start a trade war. Trade wars have existed since international trade began and continue to have significant repercussions today.
First, an example of what free trade is
Free trade is the facility granted to the commercialization of goods and services between countries. Usually it is managed through treaties, in which establish the conditions that benefit the parties. The countries will reach agreements to trade those goods in which they have greater comparative advantages. That is, it can produce the good or the service to a lower opportunity cost than your competitors.
A good example to illustrate free trade is the production of mobile phones. An American factory is in ability to assemble phones faster than a Chinese factory, which gives it competitive advantages. In addition, the American factory has the ability to also manufacture phone components, which represents a much higher value than the assembly. If you put all your time and effort into manufacturing parts, your competitive advantage will be even greater. For their part, Asians will be able to specialize in the assembly of mobiles and offer it to Americans, establishing a win-win relationship.
Thus, a FTA for mobile production, which will be beneficial for the countries involved and for the users, because costs can be reduced.
The “weapons” used in trade wars
Various mechanisms seek balance the internal economy of a country, with which they can unleash a trade war. The best known is the imposition of tariffs on imports to favor the consumption of internal products. This can also be achieved with producer subsidies, an artificial way to achieve lower production costs and increase the competitiveness of a product. In addition, there are no duty barriers, As the management of import quotas, the total import ban of a product or the establishment of bureaucratic barriers.
What reasons have triggered trade wars?
Generally, trade wars are started by economic reasons. However, they can also be used as political weapon. For example, as a way of economic pressure to resolve a political conflict or simply to win votes, as a way of internal political propaganda.
Trade wars “in full swing”
The most recent? Activation of the Helms-Burton Act
On May 2, the United States announced the activation of title III of the Helms-Burton Act, also known as the Liberty Law. This controversial law was put into effect in 1996 by then-President Bill Clinton. The title in question allows nationalized Americans and Cubans to file lawsuits for property seized by the Cuban government after the 1959 revolution. At the time, the title was not applied due to the reactions it produced in the European Union and Canada, with large economic interests on the island.
There are two main reasons the Trump administration had to activate it. On the one hand, win the support of Cubans in Florida for their reelection in 2020. On the other hand, put economic pressure on the Cuban government so that it ceases its support for the government of Nicolás Maduro. Nevertheless, reactions have not been long in coming. The European Union has expressed its disagreement as it is the “extraterritorial application of unilateral restrictive measures contrary to international law”. In addition, he has threatened reactivate complaints that he had frozen before the World Trade Organization against the United States.
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United States versus …
China, Mexico, India; tariffs on steel and aluminum; European cars … The Trump administration has been characterized by a aggressive management of its internal and external economy. And that is the mentality of the american president, “When a country (the United States) is losing many billions of dollars in trade with virtually every country with which it does business, trade wars are good and easy to win».
The year 2018 was the announcement of the increased import tariffs on aluminum and steel; 10% and 25%, respectively. The United States is the world’s largest steel importer, so the announcement triggered all the alarms about the possible start of a trade war. However, recently, he decided the elimination of these tariffs to Mexico and Canada. Part of the trade war and the agreements with Mexico are related to Central American migration to the United States through Mexico. If the Aztec country does not achieve stop migration towards your neighbor to the north, you could tariffs be imposed again to your products.
The war with China deserves a separate chapter. It began with the veto of the Huawei company, to whom accused of espionage and considered “a threat to national security.” Although the veto was extended to take effect in August, China was not far behind and also imposed new tariffs on American products.
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The trade war with India arises from the removal of privileges that this country kept for the export of products to the United States without payment of duties. In response, India also increased tariffs to 28 American products.
One more example
The Free trade agreement that exists between Egypt and Turkey could come to an end and unleash a trade war between these two countries, originated from political motives. An agreement that had been highly beneficial for both is about to break. The reason? The protection that Turkish President Recep Tayyip Erdogan gave to the leaders of the Muslim Brotherhood who fled the coup in Egypt.