Trade wars are usually an escalation of trade disputes. Although there are formal and informal channels within which to resolve trade disputes, politicians often resort to a trade war in the hope of getting quicker results. A trade war is when two trading nations use tariffs, embargoes, and other trade restrictions to reduce their imports.
Increasing the price of imports
Should the price of imports increase, then the direct effect on small businesses can be either:
- An increase in input costs: this will apply to businesses that import their inputs. A rise in their costs will squeeze margins, potentially drive losses, or result in companies shutting down.
- Limits inputs available; restricting the quota or raising the cost of imports can force businesses to source products locally. Although this may be a desired outcome by the national government, it limits the quantity, quality, and variety of products available to businesses.
- A competitive advantage: businesses that do not use imported products for their operations, will have lower costs than those that do. This will result in a price or profit advantage. This is usually the desired effect by the national government, which is to make local businesses more profitable.
Increase the price of exports
Increasing the price of exporting goods can be done by either the national or the opposing government. The effect could be:
- Make products less competitive in the export market; the opposing government usually does this as a form of retaliation or as a way to boost their industries. Making the product more expensive in export markets takes away any price advantage the small business may have.
- Increase local supply: increasing the cost of exporting goods could be a move by the national government to shore up domestic supplies. Export markets could be more lucrative than local markets, making small businesses prefer to export rather than supplying the local market. If the national government deems it necessary to provide for the local market, then it can disincentivize exports.
Trade wars are easy to start but are often hard to end. Not being able to know how or when a trade war ends can lower confidence in business. Lower business confidence means that:
- Entrepreneurs and investors are less willing to make capital investments in companies. In the long run, this will slow down production and lower productivity.
- Financial institutions, like banks, need a level of certainty to make loans. In a trade war environment, nobody knows what the end will look like. So financial institutions will become less likely to make loans to businesses for operational or capital expenditure.
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