When trade policy turns contentious: Tariffs, currency devaluation, and other trade barriers

And yet, trade barriers—including tariffs, subsidies, import quotas, currency devaluation, and other protectionist policies—are common among even the most free-market-friendly nations. Sometimes a protectionist policy (what 18th-century economist Adam Smith called a “beggar-thy-neighbour” policy) leads to a tit-for-tat response that devolves into an all-out trade war.

All nations want to act in their own best interest. What may be beneficial in the short term, however,  might be detrimental over the long term, and vice versa. Sometimes a nation will put its own needs first, especially during a period of recession, war, or civil unrest. There are noneconomic considerations such as national security or the need to protect trade secrets. Sometimes a nation’s leadership promotes a trade policy that benefits certain political insiders, despite the aggregate cost.

Sometimes, nations can work out their differences through trade agreements and diplomacy. Other times, it takes a trade war—or the threat of one—to forge trade policy that benefits all.

Currency devaluation. Countries use currency devaluation—actions taken by a government to weaken the value of its money—to make exports cheaper and imports more expensive. It’s often used in trade wars to counteract tariffs by keeping goods competitively priced. In 2019, for instance, China was accused of devaluing its yuan to offset U.S. tariffs. The tactic isn’t without its risks, including inflation and destabilizing global markets.

Beyond tariffs: Other trade barriers. Tariffs aren’t the only tools at a nation’s disposal to protect its economic interests. Countries use quotas to limit imports, subsidies to support domestic industries, and regulations to block foreign competition. Examples include the European Union’s agricultural subsidies that protect local farmers and China’s import restrictions that favor domestic producers. Such barriers are less obvious than tariffs, but can be just as disruptive and may further inflame trade tensions.

Embargoes and export restrictions. Embargoes, such as the 1973 Arab oil embargo that stopped shipments to the U.S. and several other Western nations, halt trade with certain countries to achieve political aims. Export restrictions, meanwhile, limit the sale of critical goods such as technology or raw materials. Both measures can devastate economies, disrupt supply chains, and increase tension among nations, making them powerful but risky tools in trade disputes. These trade barriers often provoke retaliatory action, escalating tensions between nations. 

How countries respond. When faced with trade barriers, countries often respond in kind by imposing counter-tariffs or export bans. Some nations form alliances to boost economic power, such as the European Union (which began in 1952 as a treaty governing the trade of coal and steel) or the United States–Mexico–Canada Agreement (USMCA). Others may challenge policies through international bodies like the World Trade Organization (WTO). These strategies can escalate disputes or pave the way for negotiation and resolution.

Trade wars, although often rooted in specific economic or political goals, tend to have consequences that extend far beyond the initial disputes. They disrupt global supply chains, raise prices for consumers, and can lead to prolonged periods of economic stagnation or even conflict. Favorable agreements may result, but the overall costs often outweigh the benefits.

The lessons from history are clear: Although nations must protect their interests, long-term economic stability and growth are best achieved through cooperation and open markets. Trade barriers might address short-term goals, but when they escalate into trade wars, the economic pie tends to shrink for everyone involved—leaving no true winners.