The previous week had been a tumultuous one for the markets. Amazon’s shares dropped more than $100 as President Trump had declared war on the retail giant. Facebook is being investigated for privacy breaches in several countries. But that aside, market investors are most concerned with the enveloping trade-wars started by the American president.
But why are trade wars bad? Aren’t we told that it can actually help boost local jobs since we will have less international competition? Let’s take a look at some reasons this is not true.
1. Long-term planning becomes difficult
If there are concerns of tariffs then a company in any country producing goods who are considering an additional manufacturing facility will think twice. For a local business who think business will improve with better trade protection, they too will have second thoughts since Trump could, and usually does, change his mind. In either case this hesitation would likely muddy up long-term planning for many businesses — not just ones directly affected by this trade war.
2. Added cost
By restricting the import of lower-cost goods into the market, costs will naturally go up. At heart of the US trade war is steel, and so all things that make use of steel (e.g. a car) will go up in price. How much more? It’s hard to say, but the usual low-low prices that Canadians are use to could be in for some sticker shock.
3. More red tape bureaucracy
With trade wars brings the added cost of extensive monitoring and collecting of tariffs. A lot more paperwork. In Canada, because we are exempt from this steel tariff, we currently have a committee in place that is specifically keeping track of other countries trying to offload steel to get around the U.S. tariffs. So, although this trade war isn’t meant to affect us we are still paying the added cost because of it.
4. Historically, trade wars don’t protect jobs
The reason for trade wars is to ultimately protect jobs from being exported. The problem is it has never worked. The American Great Depression is one example of that. Sure, some steel jobs may be saved, but due to the higher costs placed onto the economy these jobs could end up being cut nonetheless.