A trade war is a global economic conflict that often involves extreme protectionism. Nations raise tariffs and other trade barriers against each other, in part as a reprisal to similar measures taken by the other nation. During a trade war, companies that rely on international supply chains may face higher costs and reduce demand. Emerging markets and developing countries are more likely to feel the pain of a trade war.
The most visible effect of a trade war is reduced international investment, which restrains growth and may lead to financial stress and falling stock prices. This is especially problematic as monetary stimulus is wearing off and oil prices are elevated.
It is important to recognize that tariffs are not the only tools at a nation’s disposal to address its economic interests. Countries also use quotas to limit imports, subsidies to support domestic industries, and regulations that block foreign competition. These policies, which are more subtle than tariffs, can be just as disruptive and inflame trade tensions.
While most economists agree that trade barriers are generally bad for economies, there are situations when protecting certain domestic industries is beneficial. For example, maintaining defense production capacity may make sense for a nation that is heavily dependent on arms exports. It is not a good idea to maintain such protections in all cases, however. For instance, a country should carefully weigh the cost-benefits of its protectionist policies when it comes to agriculture, automobiles, or any other industry that can be competitively produced within its borders.