Types of Trade War and Their Impacts

1. Types of Trade Wars

Trade wars arise in multiple forms, depending on the methods nations use to restrict trade and retaliate against partners. Below are the major types:

1.1 Tariff-Based Trade War

This is the most common type of trade war. Countries increase taxes on imported goods from specific nations to protect domestic industries or retaliate against protectionist policies.

Characteristics

Imposition of additional tariffs (5%, 10%, 25%, even 100%).

Target industries typically include steel, automobiles, electronics, food products, or raw materials.

Often politically motivated.

Example

The US–China trade war (2018–2020), where the US imposed tariffs on $360 billion worth of Chinese goods, and China retaliated.

1.2 Non-Tariff Barrier (NTB) Trade War

Instead of tariffs, countries create regulatory barriers to discourage imports.

Types of NTBs

Strict product standards.

Licensing requirements.

Complex customs procedures.

Environmental restrictions.

Safety certifications.

Impact

These barriers indirectly make foreign goods less competitive.

1.3 Currency Manipulation or Currency-Based Trade War

A currency war occurs when a country deliberately devalues its currency to make its exports cheaper and imports expensive.

Why Countries Do This

Boost export competitiveness.

Reduce trade deficits.

Example

Allegations of China undervaluing the yuan to support export-driven growth.

Currency wars often escalate into trade wars when other nations impose tariffs in response.

1.4 Subsidy-Based Trade War

Governments provide financial support to domestic industries, giving them an unfair competitive advantage.

Forms of Subsidies

Direct financial aid.

Cheap loans.

Tax exemptions.

Export incentives.

Common Sectors

Agriculture.

Renewable energy.

Automotive.

Aviation (e.g., Airbus vs. Boeing dispute between EU and US).

Subsidy wars lead to complaints at the World Trade Organization (WTO) and retaliatory measures.

1.5 Technology or Digital Trade War

Modern trade conflicts increasingly involve technology dominance, including:

Semiconductor supply chains.

AI and data regulations.

5G and communication technology.

Cybersecurity restrictions.

Examples

US banning Huawei from 5G networks.

Restrictions on microchip exports to China.

This type of trade war influences global innovation and digital sovereignty.

1.6 Resource and Commodity Trade War

Countries may block or restrict exports of essential raw materials, such as:

Oil and gas.

Rare earth metals.

Food grains.

Lithium and cobalt.

Purpose

Gain bargaining power.

Protect strategic industries.

A notable example is China's restrictions on rare earth exports, crucial for electronics and defense manufacturing.

1.7 Sanction-Based Trade War

Economic sanctions act as a political trade weapon.

Types of Sanctions

Bans on imports/exports.

Restrictions on banking access.

Freezing of assets.

Banning technology transfer.

These measures often escalate into broader trade wars, especially in geopolitically sensitive regions.

2. Impacts of Trade Wars

Trade wars create ripple effects across economies, businesses, global supply chains, and consumer markets. The impacts can be economic, political, social, and geopolitical.

2.1 Economic Impacts
2.1.1 Higher Prices for Consumers

Tariffs increase the cost of imported goods, leading to:

Higher retail prices.

Reduced purchasing power.

Inflationary pressure.

Essential goods like automobiles, electronics, and household appliances often become costlier.

2.1.2 Declining International Trade Volumes

When countries restrict imports and exports, global trade flows decline.

WTO forecasts often show lower trade growth during trade war periods.

Export-oriented economies face revenue loss.

2.1.3 Slower GDP Growth

Trade wars reduce business investment and consumer spending due to uncertainty.
This leads to:

Lower industrial output.

Slump in manufacturing.

Reduced global GDP growth.

For example, the US–China trade war slowed global growth by nearly 0.5% during 2019.

2.1.4 Disruption of Global Supply Chains

Companies dependent on global sourcing face:

Increased production costs.

Delayed shipments.

Need to relocate factories (e.g., from China to Vietnam or India).

Industries most affected:

Electronics.

Pharmaceuticals.

Automobiles.

Textiles.

2.2 Impact on Businesses
2.2.1 Reduced Profit Margins

Higher import tariffs increase input costs, squeezing margins for manufacturers and retailers.

2.2.2 Uncertainty in Investment Decisions

Companies delay:

Capital expenditure.

Expansion plans.

Hiring.

Financial markets often respond with volatility.

2.2.3 Changing Trading Partners

Businesses may switch:

Suppliers,

Export markets,

Manufacturing locations.

This creates long-term realignment in global trade patterns.

2.3 Impact on Global Markets and Investors
2.3.1 Stock Market Volatility

Trade tensions can cause:

Sudden market dips.

Sector-specific crashes (especially tech and manufacturing).

Investor risk aversion.

2.3.2 Commodity Price Fluctuations

Conflicts between major producers/consumers influence:

Oil prices.

Metals like copper, aluminum.

Agricultural commodities.

For example, soybean prices collapsed during US–China tariff clashes.

2.3.3 Currency Market Movements

Trade wars cause currency instability as investors shift to:

Safe-haven assets (gold, USD, JPY).

Government bonds.

2.4 Social and Domestic Impacts
2.4.1 Job Losses

Export-dependent industries may lay off workers due to declining demand.

Examples:

Steel and automotive sectors.

Electronics manufacturing.

2.4.2 Reduced Consumer Confidence

People spend less during uncertain times, slowing economic recovery.

2.4.3 Inequality

Higher prices affect low-income households most, widening the economic divide.

2.5 Geopolitical Impacts

Trade wars often spill over into diplomatic disputes.

2.5.1 Strengthening Alliances

Countries may form new economic partnerships to counter rivals:

India, Japan, Australia collaboration.

EU strengthening trade agreements.

2.5.2 Rise of Protectionism

Trade wars encourage more nations to adopt:

Tariffs.

Border controls.

Localization policies.

Globalization weakens, shifting toward regional trade blocs.

2.5.3 Shift in Power Balance

When major powers clash, emerging economies like India, Vietnam, and Mexico may benefit by attracting companies shifting supply chains.

Conclusion

Trade wars are powerful economic conflicts that take many forms—from tariffs and subsidies to technology restrictions and sanctions. While countries may initiate trade wars to protect domestic industries or assert geopolitical influence, the impacts are often negative and widespread. They lead to higher consumer prices, reduced trade volumes, supply chain disruptions, stock market volatility, and slower economic growth. Businesses face uncertainty and declining profits, while workers may lose jobs due to falling exports. At a global level, trade wars reshape alliances, alter global value chains, and influence the balance of economic power.