By increasing the price of imports/exports and lowering business confidence, trade wars can greatly impact many businesses.
Trade wars, which happen when two trading nations use tariffs, embargoes, and other trade restrictions to reduce their imports, are usually an escalation of trade disputes. Although there are formal and informal channels to resolve disputes, politicians often resort to a trade war in hopes of getting quicker results.
Increasing the price of imports
When the price of imports increases, the direct effect on small businesses can be either:
● An increase in input costs: this applies to businesses that import their inputs. A rise will squeeze margins, potentially drive losses, or result in companies shutting down.
● Limits in inputs available: restricting the quota or raising the cost of imports can force businesses to source products locally. Although this may be a desired outcome by the national government, it limits the quantity, quality, and variety of products available to businesses.
● A competitive advantage: businesses that do not use imported products for their operations will have lower costs than those that do, resulting in a price advantage. This effect is usually desired by the national government to make local businesses more profitable.
Increase the price of exports
Increasing the price of exporting goods can be done by either the national or the opposing government. The effect could be:
● Making products less competitive in the export market: the opposing government usually does this as a form of retaliation or as a way to boost their industries. Making the product more expensive in export markets takes away any price advantage small businesses may have.
● Increasing local supply: raising the cost of exporting goods could be to shore up domestic supply. Export markets could be more lucrative than local markets, making small businesses prefer exporting rather than supplying the local market. If the national government deems it necessary to provide for the local market, then it can disincentivize exports.
Lowers confidence
Trade wars can be easy to start but are hard to end. Not being able to know how or when a trade war ends can lower business confidence, leading to:
● Entrepreneurs and investors being less willing to make capital investments in companies. In the long run, this will slow down production and lower productivity.
● Financial institutions, like banks, needing a level of certainty to make loans. In a trade war environment, nobody knows what the end may be. This uncertainty will make financial institutions less likely to lend loans to businesses for operational or capital expenditure.
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