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A trade war is a form of policy war where two nations square off against each other with a series of escalating punitive trade policies. While no shots are fired in a trade war, such policy wars can be very harmful to foreign relations, as well as national economies, and nations must consider the risk of setting off a trade war when they develop trade and economic policy. When the nations involved are at a political, economic, or social imbalance, the war can potentially be devastating for the loser, as seen when a developed nation engages in a trade war with a developing country that cannot compete.
Trade wars typically start with a policy decision one nation sees as hostile to trade relations, such as a change in tariffs and taxes, the creation of new subsidies, and other policies suggestive of economic protectionism. A nation might, for example, restrict fruit imports from another country due to concerns about invasive insects or fungi. The other nation retaliates with a new policy of its own, like an increased tariff on imports from the target country, and a series of policy changes can be sparked, often with specifically punitive goals in mind.
Imbalances can emerge in a trade war. A nation relying heavily on one country for imports or exports may experience economic disturbances as a result of the policy shifts, such as an inability to sell goods overseas. People relying on foreign trade for income, like farmers counting on the sale of their crops, may be impoverished by changing trade policies and this can also create political and social unrest. International organizations may become involved in an attempt to mediate the trade dispute.
The threat of a trade war is sometimes used as a negotiating tool when nations are attempting to make a trade agreement. It can also be used as a warning; if a country is thinking about implementing a new policy or charging a rival with trade manipulation, the target may suggest that the decision to go public could spark a trade war. If the nation is in a vulnerable position, the threat of trade sanctions may be enough to force it to abandon the idea.
Trade wars could be viewed as a natural outgrowth of foreign relations, free trade, and economic policy. As nations jockey for position in the global market, they use a variety of tactics to get ahead and some of these tactics can involve punitive measures against rivals or efforts to protect domestic trade.