Introduction

Trade war occurs when countries impose quotas on imported goods; as a result, foreign nations retaliate by creating similar forms which act as trade protectionism. The escalation of a trade war in most cases negatively impacts international trade.Lechthaler and Mileva (201) point out that protectionism is becoming more and more popular in recent decades and this likely to have adverse effects on the economy. Research by WTO suggests that from mid-October in 2015 to mid-may in 2016, G20economies introduced new trade protectionist provisions at a faster rate which is equivalent to five measures a week since the 2008 financial crisis. Just recently, in 2017, president Trump imposed ‘American first policy’ and withdrew the Trans-Pacific Partnership, an act that raised a heated debate (Donna, 2016). Therefore, it is vital to understand why some countries would rather trigger a trade war and take the risks of financial losses rather than cooperate and engage in free trade. One reason may be power asymmetries across countries. However, if the opponent retaliates with the same tariffs, both will lose in the process, and if all countries cooperate, the total social welfare will be better off. Trade conflict can be referred to as a ‘ Prisoner’s Dilemma’ in this situation.

In most cases, conflict among nations erupts due to the competitive advantage arising from tariffs. In this case, my dissertation will first focus on the trade war in 2018 which was initiated by the US. Trump increases tariffs on imported steel and aluminum. As a result, the European Union and China planned to fight back. However, the Europe Union and America stepped back from the trade war and focused on the agreement of ‘zero-tariffs’ on 25^th July in 2018 (Wearden, 2018). On the contrary, the American government decided to increase 25% tariffs on 50billion dollars products imported from China and meanwhile China also imposed retaliatory tariffs as a response (BBC,2018). Another question is that what is the “core reason” for a country to start a trade war and will non-economic factors have an impact on this problem;

Related Literature

Conybeare (1987) argues that bilateral trade war can be represented like a prisoner’s dilemma and both sides are not likely to cooperate unless the game is repeated. However, from the real-world experiences, the tit-for-tat strategy is what is in most cases embraced in the trade market. Trade competition existing between various countries escalates the trade war problem with each nation fighting for superiority on the market.  (Macey, 1989). However, trade wars, in the long run, costs jobs as well as depressing economic growth for nations that are involved. If this is so, then the need to understand why some countries engage in a trade war is vital.

According to Harrison and Rutstrom (1991) inflation is triggered by a trade war which further leads to the increase of prices on imported goods. The rise in prices of imports affects workers as well as consumers. In this case, nations who engage in trade wars risk making more losses as compared to gains, a fact that can be the reason as to why other nations avoid engaging this form of war. For instance, the escalation of a trade war leads to negative impacts on the nations involved in terms of higher prices, few choices and a smaller market for their goods. Therefore, countries that engage in a trade war to gain profits and even if the war negatively impacts on the company, the economy is least affected. However, those nations that avoid a trade war do it to avoid being driven out of the market by other companies, a fact that negatively impacts on the economy of any given nation. All these facts will be explained on in depth in the dissertation.

Some countries engage in a trade war to benefit their workers as well as consumers. Others fear getting involved in a trade war due to the possibilities of other nations raising barriers to imports. According to Mileva and Lechthaler (2018), trade is a vital factor that drives a country into acquiring rapid growth. However, international trade is mostly associated with trade wars which makes nations involved to defend themselves while accessing foreign markets. For instance, the US imposing tariffs on China signifies the need for China to retaliate by targeting the US’ export industries. Therefore, the retaliation of each party provokes a further response which may be harmful to other businesses. In the dissertation, I will explain the fact that most of the countries fear to enter into a trade war as a result of possible hit affecting their economies. The few that are willing to engage are those countries which can retaliate.

Hafner-Burton and Montgomery (2011) argue that international institutions cannot always avoid trade conflicts. Each institution is pressured by the desire to meets the increasing consumption needs of the citizens as well as the demand for the development of a high-quality economy. These are among the reasons that I will argue why nations engage in a trade war.

Methodology

In analyzing the question, my dissertation will employ game theory to help in evaluating a trade war situation, assuming that all nations, in this case, are rational. Firstly, the fact that bilateral trade war can be represented like a ‘prisoner’s dilemma,’ is a fact that can help in understanding why the European Union can finally cooperate with America. As for China and the US, the situation is more complicated since the trade war game has been experienced severally.  I will further use dynamic games of incomplete information to analyze the tit for tat strategy.

Secondly, I will explore tax certainty priorities over incentives in the sense that many nations that engage in a trade war mostly embrace harmful tax competition to woo global enterprises on their side probably. In most cases, this leads to a trade war which can only be managed through the introduction of enhanced tax rules that can help in fostering certainty. By so doing, tax credits will be favorable for all nations, hence building a workforce that provides an opportunity for tasks through the concept of public-private partnership.

Thirdly,  I will explore “ national security” concerns in understanding the reasons behind some countries engaging in a trade war while others don’t.  Most of the nations that are involved in a trade war unfairly impose trade restrictions without because trade obligations can put the security of a given nation at stake. In other words, a trade war can undermine the legitimacy of the dispute settlement process by introducing tariffs that are unfavorable. This fact causes many nations to fear to engage in a trade war.

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