How does a tax war on imports between 2 countries affect the rest of the world ?


With the recent incidents about both China and the USA imposing huge tariffs on imports from their counterparts, how does this affect the rest of the world ?

In: Economics

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Hey! Did you hear that Nat is being a bitch to Ashley? What happened? Anyways, whose side should we pick? Cause ultimately we have to pick a side, otherwise I don’t want to be in one of their bad side. Nat hooked me up with this hot dude and I don’t want her telling some weird stuff to him about me. But, Ashley totally throws awesome parties and I want to make sure that if this thing with Nat doesn’t work out, I have some back up boys!!! I wonder what Karen is doing.

Edit: this is why tariffs are stupid!

The clearest and most direct impact is that it shifts the pattern of global trade. China makes goods and exports them to the US. But most often, China isn’t the sole producer of such goods. Other countries like Mexico, Vietnam etc may make the same goods and also export them to the US. With the tariff, buyers may prefer to buy more from those countries not affected by tariffs and less from China.

The second less direct impact is that many goods go through may different stages in different countries in the course of their production. The simplest example is while China might make a lot of rubber soled shoes, most of the rubber used is probably imported from Brazil, Indonesia or Malaysia. (China doesn’t/cannot grow rubber trees) If the tariff reduces demand for Chinese shoes, then there will also be less demand for the rubber which then impacts those other countries.

The third issue is spending pattern. If say China is the sole producer of product X that is widely sold in the US. If tariffs increase the price of X in the US, this means that people who want or need X will have to spend a larger percentage of their income on X, this means that they have less income/money to spend on other things. A simple (fictional) example: If China produces a lot of food and a tariff is imposed on that food. Since people still need to eat, they will have to pay a higher price for their food, which means they have to spend less on going to the movies, or holidays etc.

The global economy right now is super integrated, therefore when the cirle is interupted in certain part,especially between 2 largest economies in the world,the whole system will be effected.
Don’t know all the fancy economic terms but i will try to give a few example based on my very limited knowledge.

1.interupting the supply chain.
China is the major supplier of many important raw materials that is needed by American companies.
E.g : US companies import rare earth elements from China to make batteries/magnet etc, and other countries import batteries/magnet from US to produce other electronic devices.
Now you can clearly see here that if China stop the export of rare earth elements,the electronic device companies from other countries won’t get their supply Of batteries from the US and it’s inevitably affecting their production and their stock in the market.
( There are plethora of products that affected by the tit for tat tariffs so you can imagine the size of impact)

2.consumer will hold their spend.
When trade war like this happen,the industrial companies among other sectors are affected badly because of the tariff that imposed on their products.
Some companies may closed,workers are laid off,the stock that the companies trade in market dropped etc.
People that are affected /consumer become worry about the uncertainty of the economy condition and decide to reduce their spend and of course people don’t only stop spending in their local products but also imported products from other countries.
Some countries might experience significant decreased in number of tourist (that also contribute to a country’s economy) , because people afraid to spend the money on holiday .

3.other countries become confused because they need their bilateral relationship with US and China, but it’s very tricky under the trade war because they worry that either of the big bosses will punish them by cutting of the relationship, if they think that specific country is taking their enemy’s side.

There are of course other indirect effects but they are too complex for my tiny brain.