“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
― Benjamin Graham
The basic concept of trade revolves around reducing the landed cost for the customer while maintaining a profit margin. There are three interesting sides to this. First, landed cost refers to the total expense a customer pays, which includes the product cost as well as shipping, insurance, taxes, and other associated fees. If any of these costs rise, the overall cost of trade increases. In simpler terms, lower marginal costs typically lead to more trade. This basic principle has been the foundation of globalization for centuries or even millennia. Second, for trade to continue, there needs to be a little surplus after all costs are covered for the different actors involved in the trade to repeat the action. Third, customers spend their money on products and/or services they believe are worth the investment (a principle of market economics). It’s also important to keep in mind that trade takes place within environments shaped by state actors, who can significantly impact all three of the elements mentioned above. Modern state actors have their fingers involved in all sides of business as all regulations, industrial policies as well as education and health care are part of the whole system. The nature of this game is unlimited and dynamic. This means that politics (aka. the states’ behavior) and economics (markets and business) are locked together in a never-ending tango with different levels of systemic dances, and all have different music on.
In international trade, countries compete within three different categories, absolute advantage, comparative advantage, and economies of scale. All three categories provide key understanding for individual actors, companies, and even nation-states to describe their economic reality due to differences in their factor endowments (on a country level, its land, labour, capital, and entrepreneurship) and/or technological progress. Simply put, all three categories deal with understanding the concept of marginal cost in trade. According to Ricardo (1817), the primary driver of international trade is though found in comparative advantage, related to a country’s productivity. The second (1870-1914) industrial revolution including a transport revolution has dramatically lowered the marginal cost for international shipments. Decreasing transportation costs have left room for more productivity-based competition. This places even more emphasis on the marginal cost of trade that countries can control if they regulate economic actions or engage in trade wars. Since such comparative advantage is created by industry and not given by nature, the possibilities for state actors to intervene in trade have increased. This is an opportunity that all states have used over time to different extents.
The fundamental principle in trade wars is that there is always a trade-off. As more comparative advantages are created, the number of trade-offs to be considered has grown. The four main mechanisms or “weapons” in a trade war are taxes, tariffs, quotas (all the way to bans) and subsidy’s (to local suppliers). The last three mechanisms are sometimes called industrial policies together. However, this term typically also includes a country’s infrastructure (such as transportation, energy systems, etc.), but does not encompass aspects related to financial policies and taxes. From the individual state’s perspective, industrial policies aim to improve the competitiveness and capabilities of domestic firms, aka creating better comparative advantage for actors within the own state in a relative comparison with foreign firms. What all four of these mechanisms have in common is that they make foreign products appear more expensive, thereby impacting their sales.
To better understand trade wars, it’s helpful to look back at some famous historical examples. One of the more well-known cases is the Chicken Tax (sometimes referred to as the Chicken War, but not to be confused with the Chicken Rebellion) during the 1960s. The origin of this is the tariff that France and West Germany placed on imported US chicken during 1961. The diplomatic discussions surrounding this often focused on issues like unfair competition, price dumping, and unsafe production practices—similar to the arguments heard in contemporary trade wars. The tariff imposed was 25%. The backdrop to this was a rising demand for chicken in West Germany. It’s also important to note that after WWII, chicken production in the USA became more productive, which lowered the marginal cost of producing chicken, even though it was still considered a more luxury food in Europe. To protect European chicken producers—and essentially allow the industry to develop in Europe—a tariff was imposed on cheap chicken imported from the US. As a response to this, the US government imposed a tariff of four different European products (potato starch, dextrin, brandy, and light trucks) that was imported to the US. That tariff was also on 25%. The long-term impact of this tariff is most noticeable in the light truck market, as it remains in place today. European manufacturers of light trucks, of course, attempted to circumvent the tariff through ”tariff engineering” since it made their products more expensive for US customers. Economists generally agree that this tariff has had negative consequences for the US light truck market. With less competition from foreign suppliers, domestic manufacturers have been slower to innovate, and as a result, customers end up paying higher prices for the products. This means that the long-term losers in this situation are US customers of light trucks. On the other side of the trade war, establishing chicken production capacity in Europe was easier, which meant that the tariff on imported US chicken had little impact on the price and quality of chicken in the European market after a relatively short period.
A more recent example is the steel and aluminum tariffs imposed, by the US, in 2018, and again in 2025. Analysis of the 2018 tariffs reveals some interesting findings. Firstly, the price of steel and aluminum in the US rose, as expected. Steel and aluminum producers increased their profits and created more jobs. However, since steel and aluminum are key materials used in many downstream industries like automotive and construction, their increased costs led to higher prices in those sectors. The result was fewer jobs created upstream, and a larger loss of jobs downstream, with steel and aluminum producers benefiting the most in terms of profits.
From these two examples, we learn that tit-for-tat (eye for an eye) is a central strategy in trade wars. This is evident in the 25% retaliation tariff. Moreover, retaliation tends to target areas where it will cause the most damage, rather than where it makes the most strategic sense. This is illustrated by the chicken-light truck link. As a result, trade wars create greater uncertainty across industries, as the opposing side may retaliate in ways that affect entirely different sectors than the one originally involved in the conflict. In addition, an increase in one actor’s productivity (which lowers the marginal cost of production) can easily be perceived as unfair competition by others, until they adopt the same production methods themselves. Moreover, the supply chain effects can be significant, as job creation in one sector (like steel and aluminum production facilities) often leads to larger job losses in downstream industries. This results in an overall negative impact on the economy. Lastly, the varying cost barriers across industries limit the effectiveness of the tariffs but also influence how different actors in each sector adapt. The long-term takeaway is that while industries may adjust, it’s domestic customers who ultimately bear the cost. Tariffs can indeed be seen as an indirect consumption tax on a country’s own population. Import taxes (for any reason) and quotas function in a similar way to tariffs. Subsidies, on the other hand, mean that citizens indirectly pay for products and services through their tax contributions as well. The overall result is that all four trade war strategies indirectly affect a country’s inflation (typically leading to an increase). Inflation tends to impact lower-income households more, while higher taxes disproportionately affect higher-income households. From an economic standpoint, trade wars often only have losers.
The interesting part is that politics continues to drive the practice of trade wars despite this knowledge. The reason for this lies in the political and strategic goals behind trade wars. Politicians may believe that trade wars can help protect domestic industries, create jobs, or strengthen national security in the short term, even at the cost of long-term economic damage. Additionally, the immediate benefits of retaliatory actions or protecting certain industries may be more visible and politically appealing, especially if voters or influential lobby groups are directly impacted. Essentially, political leaders often weigh these short-term gains or political points over the broader economic consequences.
In politics, as in economics, there is a significant difference between short-term and long-term policies. In the short term (especially with an eye on the next election), the full negative effects of trade wars are often minimized, while any positive effects are exaggerated. This makes trade war policies easier to ”sell” to domestic voters. Additionally, firms that face less competition and the ability to raise their prices rarely speak out against these policies, as they stand to benefit from them. However, any state that finds itself in a strong competitive trading position, driven by productivity, technology, and innovation, will aim to minimize trade barriers as much as possible. Additionally, control over and access to critical raw materials will be crucial here as it increases the possibility to control the situation. Such a state, with these advantages, will seek to increase its share of global trade. The path to achieving this is to encourage everyone to reduce all trade barriers, including ensuring the availability of affordable sea transport and providing protection against traditional threats like pirates or privateers.
However, the real political advantage lies in the nature of politics itself—particularly the negotiation process, both domestically and internationally. Domestically, trade wars can be used as a bargaining chip to rally support or secure concessions in other areas. Internationally, these policies can create leverage in negotiations, allowing countries to extract favorable deals or defend national interests more aggressively. Thus, while trade wars may be economically damaging in the long run, they can be seen as a tool for achieving short-term political goals, where the strategic benefits outweigh the potential economic costs in the eyes of policymakers.
All four mechanisms of trade wars are a way to create bargaining possibilities with everybody else in the infinite game of world politics including economics and traditional warfare. One result of this is that tariffs tend to persist, as removing them can be politically difficult in the short term. A good example of this is Sweden’s reduction of protectionism in the 1960s and 1970s for the textile and shipbuilding industries. In the short term, this led to a dramatic shift in local market conditions, with significant disruption as the local industries faces overwhelming international competition and over a decade or two, died. However, the long-term effects can be described more positively, as the industries eventually adapted and became more competitive.
Politics often fears short-term, massive negative impacts, which is why it’s challenging to remove trade barriers unless ”the other side” also takes similar steps. Policymakers may hesitate to make such changes unilaterally, as it could lead to immediate disruptions that are difficult to manage politically, even if they would bring long-term benefits. This reluctance to act independently often keeps tariffs in place, even when they no longer serve their original purpose.
Trade wars have always been present, sometimes making headlines, but more often remaining in the background of political decision-making. These politics are deeply embedded in the development of products and production methods, which aim to serve markets of customers who make their own purchasing decisions. Small changes occur every day, but major changes have the potential to shift the system’s behavior until a new stable state is reached. This ongoing adjustment process is what defines the evolution of trade relations and economic dynamics over time. Every change in the global economy changes at least two other things, somewhere in the wider system. Important to remember is that the more efficient a system or supply chain becomes, the more fragile it becomes, to all types of disturbance. A wise political actor in this kind of system introduces changes gradually and at a predictable pace. This approach is at the heart of the liberal worldview, which has led to significant wealth creation for many globally. However, as with any system, those who perceive themselves as losers in certain situations will seek to influence the system in ways that redirect wealth more in their favor. This dynamic is what drives trade wars, just as in traditional wars, and ensures that they will always be a part of human societies. Even in a system that promotes gradual and predictable progress, there will always be actors pushing for changes that serve their own interests, sometimes leading to conflict in the process.
All wars are political instruments that arise from clashes in political interests and are used to resolve those conflicts. These clashes evolve dynamically, as do the interests of the parties involved and their ongoing responses to one another. Trade wars, though fought with different weapons than traditional wars, ultimately aim to achieve a more favorable outcome for the parties involved. Current trade wars follow a similar trajectory to past ones, but with different details, meaning that while the underlying dynamics are familiar, the specific outcomes will vary based on those differences. The tools and strategies used in each trade war may change, but the fundamental goal remains the same—shaping the economic landscape to benefit one’s own interests.