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Nobody wins in a trade war

Case study: It was 1930, in the great depression of America. In an effort to protect American industries from losing customers to foreign competitors, they enacted the Smoot-Hawley Tariff Act, which imposed taxes on imported goods. This was the trigger, the start of the trade war.

Canada and Europe retaliated with imposing taxes on imports as well. They abandoned their trading alliance with the United States and developed a new partnership with a neighboring country, the then Soviet Union, Russia instead.

So who won the trade war? It was certainly not America. It was Russia, who gained new trading relationships. They did not participate in the trade war, but they were the only ones who benefited from it.

So, at least somebody sort of “won” from the war, but the ones who lost the most were the very citizens that the initial bullet was trying to protect: the American consumers. The prices for the commodities that they used to enjoy rose. These include the basic needs that their country cannot produce. In turn, these additional taxes lower the spending budget that average consumers would have for buying local products they would have consumed otherwise. So the trade war only served to cramp the flow of money in their economy.

How an open economy promotes global peace

A trade war uses everyday products as weapons. This is possible by placing heavier taxes on imported goods. They usually call these tax efforts “protectionism,” wherein they try to protect local industries through taxing imports, which is an irony of ironies. In the course of economic history, protectionism has only served to harm the local industries. The pawns in these circumstances are the consumers. As human communities are by nature co-dependent, this poses a problem.

When one country is rich in oil, another rich in agriculture, and yet another in technology; it is more practical for these countries to trade specialties with each other instead of struggle to produce all the needs on their own. This is the reason why we have developed international trade over the centuries.

The history of the modern concept of free trade started in the heat of World War II, in 1944 at a meeting of liberal idealists in Bretton Woods New Hampshire. With World War I and the great depression still fresh in their minds, these thinkers tried to think of a way of using economics in fostering world peace. Their solution was an interdependent supply chain that prevented countries from waging war with each other. Four years later, they developed the General Agreement on Tariffs and Trade (GATT).

The 14 Principles of Management by Henri Fayol states the division of work as the number one principle for management. Not all parts of the body could perform the same function. Each has a specialty. It is safe to conclude that the popular aphorism, “no man is an island,” also rings true in the bigger scale of things. It plays a bigger role in macroeconomics than we give it credit for.

We have a trade surplus when the net export is greater than the import. We get a trade deficit when the net export is lower. However, trade deficits aren’t necessarily bad news. When we think of trade surplus, we instantly get the connection that a country earns from the trade. In trade deficits, it is not so obvious why it should equate to a thriving economy, but it does.

Why trade deficits are a good thing.

Trade deficits, simply put, happens when the country takes in more imports from other countries than they send out. From the surface, it looks like the country is losing money. However, what it really means is that getting imports from other countries are easier and cheaper for the host country. In short, it only shows that the country with greater net imports are in fact richer.

The real value of international trade lies in the idea that it doesn’t make sense to do everything on your own when you know you can trade with other countries that have a comparative advantage. There are many issues this open economy opens, but let’s look from the perspective of the host country: the importer.

Many people argue that shipping production lines offshore means taking away jobs from the local industries to outside forces. However, is this business practice really a betrayal to your home country? Let’s take a deeper look into the matter.

How outsourcing work actually supports local communities

We won’t go straight away to discussing the good stuff. As any other business disruption, outsourcing work comes at the cost of shedding jobs. However, it usually results to developing more quality jobs in the affected area.

Take for example outsourcing customer services. When a business manager needs to compete with low prices or competitive quality services or products in the market, he would need to cut costs in operations and/or reinvest savings (in the case of financing services or product improvements). As the business is primarily a service or product provider this means that it is the non-core but essential tasks that need to be re-assessed.

The business manager could decide that outsourcing customer services may be the best way to go. Labor cost is cheaper outside the country and this would enable the business to employ more people for core business tasks in improving products, should they need to.

In addition to this benefit is from the perspective of the local consumers. When they see a product that is cheaper, regardless of whether it is made in their local country or not, they will buy the cheaper option with just as good quality. This may seem terrible at first, but then what happens to the money they saved on? It enables them to actually have more money to splurge on local stuff, like concerts or dinners they couldn’t have afforded otherwise, which supports their local industries.

In this example, not only were the average consumer given the option to buy cheaper products to support their quality of life or the business manager enabled to save on operational costs, the locals were also given more jobs to choose from — hopefully more quality ones. In economic theory, international trade re-shuffles jobs from one industry to another — not from one country to another.

The issue may be larger than we think. International trade is dependent on demand, political stability, interest rates, and most importantly: the exchange rate. Nevertheless, past experiences have already proven that for its innumerable factors, the open economy promotes a mutually healthy economy for all the concerned parties than trade wars. This is the reason international organizations such as World Trade Organization (WTO), which replaced the GATT, were established to eradicate protectionism.

Maybe you’d like to consider outsourcing

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Reach out to us and find out more about our services.