A trade war erupts when countries engage in a tit for tat escalation of tariffs, taxes and restrictions on the supply of imported goods within their borders.
US President Donald Trump recently sparked fears of such an event, announcing considerable tariffs on imported aluminium and steel, with claims this would help US producers.
The European Union (EU) quickly hit back saying that if it was subject to tariffs by the US, it would retaliate by targeting high-profile businesses like Harley-Davidson and Levi’s jeans, which operate within the home states of senior government figures.
Mr Trump then claimed he could fire back against European carmakers, and so the rhetoric goes.
According to Jeremy Lawson, chief economist at Aberdeen Standard Investments, while the US President’s move has increased the risk of a trade war, it still remains a remote possibility.
“President Trump’s announcement of tariffs on imported steel and aluminium represents just the latest skirmish in a US trade agenda that is heading in a more and more protectionist direction,” he said.
Mr Lawson said the current aluminium and steel tariffs are likely to damage the US economy “at the margin”, without meaningfully impacting its global trade deficit.
He insisted that businesses and investors should be more concerned about the rising tensions between the US and China, particularly given the political and economic impacts such a stoush has on two of Australia’s largest trading partners.
“The US president’s general approach to China … is different to his predecessor. He’s rebuffed Chinese efforts to avoid tensions, including offers of market opening and increased imports, and has declared China a ‘threat’, guilty of economic aggression,” said Mr Lawson.
“[Mr] Trump’s latest trade agenda signals his intent to pressure China. There have been reports that trade hawk Peter Navarro is to be promoted to a more powerful role within the Trump administration. This, coupled with administration statements that it intends to significantly alter the economic relationship with China, point to further barriers to trade and investment between the two countries.”
Mr Lawson concluded: “None of this is good news for a world whose fortunes revolve around its two largest economies and superpowers.”