Trade war, as the name suggests, is a war that happens between two or more countries by imposing tariffs, often driven by retaliation, on each other to strengthen their economy. Trade war often gets started when a country perceives its counterparts’ trading practices as unfair or unethical, thus triggering the protectionism of the country by imposing a higher tariff on the imported goods to create selling pressure, making it less attractive to consumers.
Tariff is the tax imposed by the government on imported goods to increase the price of the goods, encouraging consumers to buy more locally made goods instead of imported ones. It is not particularly bad for countries to raise tariffs on each other’s exported goods yet it can get ugly when political reasons involved and the war gets out of hand. Tariffs get weaponized by countries for its own sake hence devolve into a trade war.
The flare-up tension in the ongoing trade war between the world’s two biggest powerhouses, the United States and China has unintentionally slowed down the global economic growth. Both sides have been imposing retaliating tariffs on each other’s exported goods. Industries related to automobiles, technology and agriculture have been vulnerable under these circumstances.
Unnecessary financial burden is added to manufacturers and cast a cloud of uncertainties over international commerce. Things can get complicated by affecting the international supply chain of goods due to the adjusted prices and brings turbulence to the countries who are not even involved in the first place.
Not only the big industries but consumers are also feeling the squeeze from the adverse effects caused by trade war. The cost of the raw materials that can only be obtained overseas is growing while exported goods are facing trade restrictions from other countries, raising the final price of the products. These collateral damage might be irreversible and have permanent damage to the country’s economic growth.
When the export of a country is punished, so does their currency.
The prolonged trade war can morphs into a currency war for countries to take shelter and protect their economies, meaning devaluing their currencies deliberately to stimulate the export sector and local businesses.
Currency war is a big no for the Forex market and traders. Even though it might bring benefits to the countries, helping them to gain a competitive edge in global trades, but it also amplifies the uncertainty of currencies with the possibility of higher inflation and deterring foreign investments, making the Forex market much more volatile.
The worst of all is trade war could divide the world into two or even more spheres of economic competitions, inevitably forcing nearby countries to align themselves by picking which side they want to stand with. It breaks the diplomatic bond between allies when the country decided to reduce the trade deficit between each other aggressively to compete for each other’s economy.
As trade war lingers and intensifies without a proper deal, the uncertainty for the global economy will get bigger day by day, bringing harm to factories, businesses, Forex market and eventually, the consumers. As Forex traders have equal potential to take profit in both bullish and bearish market, traders are advised to always keep an eye on the waves of trade war and catch the best wave when it hits.