For eons, trade and tariff policies have impacted the global economic and financial landscape. They have the ability to disrupt international supply chains, cause volatility in financial markets, and impact many sectors of the global economy. Giving both short- and long-term impacts on the global trade.
Trade and tariff policies also highlight the economic relationship between countries, showcasing how new trade agreements enhance relationships between countries. Bringing in economic prosperity if all concerned countries are cooperative. However, in more recent world news, we can see how politics play a big role in international trade policies.
The recent US-China trade and tariff war has led to global consequences, both positive and negative. Before we delve into that, let’s understand a few things.
How do tariffs affect the economy?
Tariffs are both winners and losers in an economy. How?
Tariffs help governments generate billions in revenue for the country. On the other hand, for businesses and importers, it’s an added cost. Consumers who use the imported products end up paying higher prices. This cause and effect could lead to an inflationary effect, especially when traffic becomes extremely high.
Most economists argue that tariffs are bad for the economy. They bring out the point on economic specializations, where tariffs prevent countries from reaping their benefits. With an example of how it might be cheaper to source arms on the world market, however, there is a strategic advantage to maintaining domestic production from a defence sector viewpoint.
So, what is a trade war?
It’s when a government imposes tariffs on another country. Often punitive in nature, in the name of protectionist trade policies. Trade wars often become mutually damaging, as higher costs of trade are paid eventually by the consumers. On the other hand, there are advocates in favour of trade wars. They believe it protects the domestic industry and businesses.
What is the Impact of Trade Wars?
The global trade disruptions can be due to changes in the political structure of one or more countries, a natural calamity, shipping delays, or other factors. This can lead to specific impacts in the global market, such as:
1. Supply chain disruptions
During trade wars and new tariff rules, businesses are pushed to switch suppliers, delaying deliveries and increasing input costs. Disrupting the everyday functioning of supply chains.
For example, the rising US tariffs pushed China to revise its confidentiality clause. Creating a new trend where all suppliers in China were directly posting how to reach them for individual or wholesale orders. From luxury products like diamonds and gemstones, to everyday use products like dishwashing soap. Causing a major supply chain disruption for many large businesses globally.
2. Increased cost borne by consumers
What is often left out by the media and reports is how consumers have to deal with inflation and a bearish market. New tariffs and trade barriers often raise prices, leading to a rise in inflation, reducing consumers’ purchasing power.
For example, the US-China trade war only makes it more expensive for US businesses to import from China. Leading them to charge consumers a higher price for the same product, as they pay a higher tariff to the government.
3. Financial markets: Bullish to bearish
Trade wars often disrupt the market, making it volatile. Creating uncertainty that leads to reduced investor confidence.
In early April 2025, US President Donald Trump announced reciprocal tariffs on 57 countries. With a range of 11-49%, for India, the rate was at 26%. Impacting the manufacturing hub in Asia, which led to a market crash within a week. Why? As the tariff directly impacts the business, operations, and supply chain in the Asian continent, it creates distrust in the market for investors.
4. Strained international relations and communication
Due to high tension during trade wars, international tensions often rise. As countries slap each other with tariffs, in the name of protecting their own industries, they hurt the day-to-day economic activities. This tends to damage and deteriorate diplomatic relationships. Straining ties amongst international diplomats and executives.
As Fivaable rightly quotes in their article ‘The World Trade Organization tries to keep things fair, but it’s tough. Global supply chains get tangled, trade deficits cause tension, and economic nationalism fuels protectionism. It’s a complex dance of money and power.’
5. Shifts in global supply chains and rekindling global dynamics
Businesses are pushed to diversify their supply sources. They tend to scout for new vendors, leading to the reconfiguration of production networks. At times, it brings two nations closer together that were earlier estranged for years. Rekindling the global friendship dynamics with new trade agreements. Fostering more growth between the two countries.
A prime and most recent example of this is the US tariff policy towards India for milk-based products, which led India to diversify and join hands with New Zealand. A partnership that was estranged for over a decade is now in full swing, opening new doors for other sectors.
Apart from these implications, some countries do tend to hold bilateral negotiations with each other. They also stay in the game longer via partnerships with other major trade actors. In the current US tariff war, it’s been wise for India to host conversations with the European Union and G20 members for its import-export.
Consider China, a major world exporter, has also been visiting neighbouring countries to strengthen ties. This comes after the ongoing traffic war between US-China.
– China’s Xi visited Malaysia to showcase how China can be a better partner than the US.
– His visit to Vietnam was the talk of the town. He was expected to oversee the signing of around 40 agreements. Including how Vietnam will accept Chinese loans of $8.3 billion for the railway project connecting northern Vietnam with China.
– Xi also visited Cambodia to strengthen financial support conversations.
His visits are diplomatic and strategic. Showcasing the collective power of Southeast Asian nations to the new Trump-led US administration.
The current trade wars teach us the impact of geopolitical policies on a global scale. Highlighting how critical the international business landscape is. Demanding experts who have the know-how of culture and trade policies to navigate business operations.
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➣Explore the MBA International Business at MBA ESG India.
