What's Up With the Trade War Talk?

Global trade has been in the headlines recently thanks to new U.S. steel and aluminum tariffs and hefty tariffs now being proposed by the U.S. on goods from China.

The taxes on steel and aluminum — 25 per cent on steel imports and 10 per cent on aluminum — were unveiled by U.S. President Donald Trump in a bid to protect U.S. producers of the industrial metals. Because of the ongoing North American Free-Trade Agreement (NAFTA) negotiations, however, Canada and Mexico got an exemption from those tariffs.

Separately, President Trump on Thursday unveiled a plan to impose tariffs on around US$50 billion of Chinese imports.

The tariffs have resulted in rumblings of a potential trade war, which got us thinking about trade wars in general. Just what are they? And what's happened with trade wars in the past? We dug in to find out a little more.

Trade Wars Defined

What is a trade war? Simply put, it's "a situation in which countries try to damage each other's trade, typically by the imposition of tariffs or quota restrictions." That's the official definition according to the Oxford Dictionary. The war part comes into play because when one country implements a tariff, the country being affected will often consider some retaliatory measures on products coming across its borders.

Last Time Around

For steel at least, the U.S. last stepped into trade war territory in 2002 when then- President George W. Bush announced tariffs on imports of the industrial metal. Canada was exempt that time, too. Reports on the outcome of that case for the U.S. were mixed, ranging from job losses and higher consumer prices to increased production and higher wages. Those tariffs were cancelled after just one year, following threats of retaliation from Europe and a ruling by the World Trade Organization that called the tariffs illegal.

A Historical Example

The Smoot-Hawley Tariff Act of 1930 is behind one of the most well-known trade wars. Named after its chief sponsors — Reed Smoot, a Senator from Utah, and Representative Willis Hawley, from Oregon — the act has been blamed by some for worsening the Great Depression and contributing to the start of the Second World War. The bill imposed steep tariffs on hundreds of goods imported into the U.S., leading the country's trading partners to retaliate and causing world trade to plummet. The tariffs were repealed in 1934.

What's Next?

Trade is likely to remain a hot topic for the next few years as NAFTA negotiations continue to play out, but whether a full-blown trade war emerges remains to be seen.

RBC Global Asset Management's Chief Economist Eric Lascelles wrote recently that while the steel and aluminum tariffs themselves "have only limited direct consequences," they "have a real chance of turning into a full-on trade war — and the same goes for recent Chinese tariffs."

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