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Article History Table of Contents *** - [Introduction](https://www.britannica.com/money/trade-war-meaning#ref2259644-1) - [Tools of the trade war: Tariffs, currency devaluation, and more](https://www.britannica.com/money/trade-war-meaning#ref402825) - [From trade barrier to trade war](https://www.britannica.com/money/trade-war-meaning#ref402826) - [The broader impact of trade wars](https://www.britannica.com/money/trade-war-meaning#ref402827) - [The bottom line](https://www.britannica.com/money/trade-war-meaning#ref402828) Read More [ What housing market data can indicate about the broader economy](https://www.britannica.com/money/housing-market-data) [ Economic cycles: Investing through boom and bust](https://www.britannica.com/money/stages-of-economic-cycle) [ Consumer spending: Here are the top reports to follow](https://www.britannica.com/money/consumer-spending-report) Table Of Contents  Open full sized image Currency wall: The global stakes of trade disputes. © kamui29/stock.adobe.com, © tortoon/stock.adobe.com; Photo illustration Encyclopædia Britannica, Inc News • [Already under financial pressure, Midwest soybean farmers are squeezed further by tariffs, Iran war](https://www.britannica.com/news/2259644/5731e2d79ce125bfa0a667a862dbe35e) • Apr. 13, 2026, 7:00 PM ET (AP) ...(Show more) If you’ve ever studied economics or listened to a group of economists speak, you know how hard it is to get universal agreement. But one thing they generally agree on is that [international trade](https://www.britannica.com/money/international-trade), when [structured properly, benefits all parties](https://www.britannica.com/money/comparative-advantage). Any barrier to free trade tends to shrink the overall economic pie. And yet, trade barriers—including [tariffs](https://www.britannica.com/money/tariff), subsidies, import quotas, currency devaluation, and other [protectionist policies](https://www.britannica.com/money/protectionism)—are common among even the most free-market-friendly nations. Sometimes a protectionist policy (what 18th-century economist [Adam Smith](https://www.britannica.com/biography/Adam-Smith) called a “[beggar-thy-neighbour](https://www.britannica.com/topic/Smoot-Hawley-Tariff-Act)” policy) leads to a tit-for-tat response that devolves into an all-out trade war. ## Key Points - Trade barriers can protect domestic industries but often lead to retaliation and higher costs. - Trade wars escalate tensions, disrupt economies, and can have far-reaching consequences, including recessions and supply chain disruptions. - International initiatives such as the World Trade Organization (WTO) aim to reduce trade barriers and promote stability. 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](https://www.britannica.com/money/recession-vs-depression), 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. ## Tools of the trade war: Tariffs, currency devaluation, and more **Tariffs.** Countries impose [tariffs—taxes imposed on imported goods](https://www.britannica.com/money/tariff)—to apply pressure on trading partners and encourage businesses to source goods from other nations. The [ongoing trade war between the U.S. and China](https://www.britannica.com/money/US-China-trade-war) is a prime example. The U.S. has imposed tariffs on Chinese electronics, and China has responded with tariffs on U.S. soybeans and other agricultural products. ## Historic trade conflicts - **1815–1846: Corn Laws.** Britain’s high tariffs on imported grain protected landowners but caused widespread hardship, leading to their repeal and a shift toward free trade. - **1890: The McKinley tariff.** This U.S. tariff raised import duties to unprecedented levels, protecting American industries but increasing consumer prices and sparking political backlash. - **1930: [Smoot-Hawley Tariff Act](https://www.britannica.com/topic/Smoot-Hawley-Tariff-Act).** The U.S. enacted steep import duties to protect domestic industries, but the policy exacerbated the Great Depression and worsened global trade conditions. - **1973: Arab oil embargo.** OPEC nations halted oil exports to the U.S. and others, imposing trade restrictions to achieve political goals during the Yom Kippur War. - **2018–present: [U.S.–China trade war](https://www.britannica.com/money/US-China-trade-war).** A series of escalating tariffs disrupted [supply chains](https://www.britannica.com/money/what-is-supply-chain-management), reshaped global trade patterns, and highlighted tensions between the world’s two largest economies. - **Emerging tech restrictions.** New export controls on semiconductors and [artificial intelligence](https://www.britannica.com/money/ai-rules-and-regulations) (AI) underscore the growing role of geopolitics in trade. **Currency devaluation.** Countries use currency devaluation—actions taken by a government to weaken the [value of its money](https://www.britannica.com/money/currency-exchange-rates)—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](https://www.britannica.com/money/renminbi) to offset U.S. tariffs. The tactic isn’t without its risks, including [inflation](https://www.britannica.com/money/what-is-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](https://www.britannica.com/event/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](https://www.britannica.com/topic/European-Union) (which began in 1952 as a [treaty governing the trade of coal and steel](https://www.britannica.com/topic/European-Coal-and-Steel-Community)) or the [United States–Mexico–Canada Agreement](https://www.britannica.com/event/North-American-Free-Trade-Agreement/Renegotiation#ref341037) (USMCA). Others may challenge policies through international bodies like the [World Trade Organization](https://www.britannica.com/topic/World-Trade-Organization) (WTO). These strategies can escalate disputes or pave the way for negotiation and resolution. ## From trade barrier to trade war Consider two nations, Nation A and Nation B. Suppose the world economy is booming, and Nation A believes it’s a great time to build up its automobile manufacturing industry. It may choose to restrict auto imports temporarily, even though it will mean more expensive vehicles for its consumers in the short term, and will likely upset the auto industry in Nation B. But because the overall economy is booming, neither nation feels the pinch. Now suppose, after a few years, the policy has worked so well that Nation A is able to begin exporting its vehicles to Nation B. At this point, the nations have a choice: - **Negotiate a trade agreement.** Nation A may be allowed to export cars to Nation B, but Nation A must drop its import restrictions on autos made in Nation B. Or it may ask Nation B to agree to import more agricultural products, textiles, or other goods that Nation A may produce in abundance. - **Begin a trade war.** Nation B could add a 20% tariff on autos made in Nation A. And Nation A might respond by suppressing the value of its currency relative to that of Nation B by 20%, thereby keeping its exported autos competitively priced in Nation B’s consumer market. So Nation B could raise its tariff, or add trade barriers in other areas of the economy. In extreme cases, a trade war can elicit a military response. For example, many economists and historians point to the Smoot-Hawley Tariff, which raised import duties to protect American farmers and businesses in the early days of the [Great Depression](https://www.britannica.com/event/Great-Depression), as not only exacerbating the global economic meltdown, but also contributing to the rise in extremism that culminated in World War II. ## The broader impact of trade wars ## Reshoring: Globalization in reverse In the decades after World War II, [offshoring](https://www.britannica.com/money/offshoring)—the practice of outsourcing operations from industrialized nations to those less developed—had been the trend, to the benefit of all parties involved. In recent years, supply chain disruptions, wage inflation, and national security interests prompted some industries to “deglobalize.” [Learn more about reshoring](https://www.britannica.com/money/reshoring-deglobalization) and which industries may be most affected. 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](https://www.britannica.com/money/what-is-inflation), 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. ## The bottom line Despite the prevalence of trade barriers, the international community has long recognized the benefits of reducing them. Efforts by the WTO and its predecessor, the [General Agreement on Tariffs and Trade](https://www.britannica.com/topic/General-Agreement-on-Tariffs-and-Trade) (GATT), aim to promote free trade and resolve disputes peacefully. Although not perfect, these frameworks have helped lower global tariffs, foster economic growth, and prevent trade conflicts from escalating into larger crises. Table of Contents *** - [Introduction](https://www.britannica.com/money/financial-engineering#ref2255563-1) - [What is financial engineering?](https://www.britannica.com/money/financial-engineering#ref389315) - [What financial engineers do](https://www.britannica.com/money/financial-engineering#ref389316) - [Becoming a financial engineer](https://www.britannica.com/money/financial-engineering#ref389317) - [Is financial engineering good for investors?](https://www.britannica.com/money/financial-engineering#ref389318) - [The bottom line](https://www.britannica.com/money/financial-engineering#ref389319) Read More [ Oversight and management: The corporate C-suite and board of directors](https://www.britannica.com/money/c-suite-meaning) [ What is a corporate social responsibility (CSR) report?](https://www.britannica.com/money/corporate-social-responsibility-report) [ Payment for order flow: How it works and why it matters](https://www.britannica.com/money/payment-for-order-flow-explained) Table Of Contents [Investing](https://www.britannica.com/money/browse/investing) [Markets & Regulation](https://www.britannica.com/money/browse/Markets-Regulation) # Financial engineering: Agent of innovation or market chaos? The Dr. Jekyll and Mr. Hyde of Wall Street professions. Print Cite Share **Written by**Allie Grace Garnett [Allie Grace Garnett](https://www.britannica.com/money/author/allie-grace-garnett/12922619) Allie Grace Garnett is a content marketing professional with a lifelong passion for the written word. She is a Harvard Business School graduate with a professional background in investment finance and engineering. **Fact-checked by**David Schepp [David Schepp](https://www.britannica.com/money/author/david-schepp/12995277) David Schepp is a veteran financial journalist with more than two decades of experience in financial news editing and reporting for print, digital, and multimedia publications. Table of Contents *** - [Introduction](https://www.britannica.com/money/financial-engineering#ref2255563-1) - [What is financial engineering?](https://www.britannica.com/money/financial-engineering#ref389315) - [What financial engineers do](https://www.britannica.com/money/financial-engineering#ref389316) - [Becoming a financial engineer](https://www.britannica.com/money/financial-engineering#ref389317) - [Is financial engineering good for investors?](https://www.britannica.com/money/financial-engineering#ref389318) - [The bottom line](https://www.britannica.com/money/financial-engineering#ref389319) Read More [ Oversight and management: The corporate C-suite and board of directors](https://www.britannica.com/money/c-suite-meaning) [ What is a corporate social responsibility (CSR) report?](https://www.britannica.com/money/corporate-social-responsibility-report) [ Payment for order flow: How it works and why it matters](https://www.britannica.com/money/payment-for-order-flow-explained) Table Of Contents  Open full sized image Info in, profit out? © bandung/stock.adobe.com, © phonlamaiphoto/stock.adobe.com, © Quality Stock Arts/stock.adobe.com; Photo illustration Encyclopædia Britannica, Inc. The term *financial engineering* almost sounds made up. After all, what does money have to do with mechanical or scientific protocols? Not much, at a glance. But [engineering](https://www.britannica.com/technology/engineering) at its core is focused on problem-solving, and there’s no shortage of problems when it comes to money. Financial engineering attempts to solve problems through innovative financial products and strategies. One product that’s gained notoriety is the [mortgage-backed security](https://www.britannica.com/money/mortgage-backed-security) (MBS), which played a significant role in the [2007–08 financial crisis](https://www.britannica.com/money/financial-crisis-of-2007-2008) and helped give financial engineering a bad name. Depending on whom you ask, financial engineering is either a profession on the cutting edge of innovation or one that can create conditions for market chaos. And the truth is, it’s probably both. But financial engineering doesn’t have to be a dirty phrase. ## Key Points - Financial engineering is an interdisciplinary field centered on sophisticated data models. - Financial engineers frequently have advanced graduate degrees and coding skills. - The financial crisis of 2007–08 exposed manipulative financial engineering practices. ## What is financial engineering? Financial engineering is a practice that integrates advanced [mathematical](https://www.britannica.com/science/mathematics), [statistical](https://www.britannica.com/science/statistics), and [computational techniques](https://www.britannica.com/science/computer-science) to create, develop, and analyze advanced financial products. Professionals use quantitative methods and sophisticated financial models to develop strategies and quantify uncertainties. These models are core to financial engineering. Various applications of financial engineering can enable organizations to take calculated and strategic approaches to corporate finance. Financial engineering may also drive innovation by creating new tools and structures that advance modern finance. ## What financial engineers do Financial engineers (sometimes known as quantitative analysts) design and develop financial instruments, models, and strategies. Mathematical, statistical, and computational techniques are all in a financial engineer’s wheelhouse. ## Quantitative analyst or financial engineer? The roles of quantitative analyst and financial engineer overlap. Both apply mathematical and computational methods to solve financial problems. But quantitative analysts are typically oriented toward research, while financial engineers more often focus on practical applications and product development. Financial engineers are commonly employed by [banks](https://www.britannica.com/money/bank), [hedge funds](https://www.britannica.com/money/hedge-fund-investment), [investment banks](https://www.britannica.com/money/investment-bank), [insurance companies](https://www.britannica.com/money/how-does-insurance-work), and other financial institutions. They apply their skills in several ways: - **Risk management.** Financial engineers develop models to identify, quantify, and [mitigate financial risks](https://www.britannica.com/money/types-of-investment-risks), often helping institutions [hedge against](https://www.britannica.com/money/hedging) [market volatility](https://www.britannica.com/money/stock-market-volatility) and operational risks. - **Derivatives pricing.** Financial engineers use advanced models to price [derivatives](https://www.britannica.com/money/derivatives) (structured securities like [options](https://www.britannica.com/money/what-are-option-contracts) and [futures](https://www.britannica.com/money/what-is-a-futures-contract)) in traditional and decentralized finance. - **Algorithmic trading.** A financial engineer may design and optimize [algorithms](https://www.britannica.com/science/algorithm) that execute trades automatically based on predetermined criteria. - **Portfolio management and optimization.** Models developed by financial engineers may help investors to manage and optimize their portfolios. Sophisticated asset allocation strategies can maximize returns while minimizing risk; integrate investing criteria related to [environmental, social, and governance](https://www.britannica.com/money/esg-investing-trends) (ESG) factors; and leverage alternative data sources like [social media](https://www.britannica.com/topic/social-media). - **Quantitative analysis.** Using complex models, financial engineers analyze data to inform and guide their decisions, ensuring that choices are grounded in evidence rather than assumptions. [Artificial intelligence](https://www.britannica.com/technology/artificial-intelligence) (AI) enables financial engineers to incorporate vast amounts of data to help improve their models’ analytical precision. - **New product development.** New structured products, such as [exchange-traded funds](https://www.britannica.com/money/exchange-traded-funds-etfs) (ETFs), are likely to be designed by financial engineers. An engineer typically develops complex models to predict the financial performance of a new product or service. ## Becoming a financial engineer Many financial engineers hold graduate degrees, while others pursue a certificate, which takes much less time—from four months to two years, depending on the program. If you’re looking to become a financial engineer, some combination of these steps is likely required: - **Earn a [bachelor’s degree](https://www.britannica.com/topic/bachelors-degree) in a financial or technical field.** Not many colleges offer undergraduate programs in financial engineering, so you’ll likely need to start by studying mathematics, economics, computer science, or engineering. - **Obtain a [master’s degree](https://www.britannica.com/topic/master-degree) in financial engineering.** A common precursor to becoming a financial engineer is earning a master’s degree. Many colleges and [universities](https://www.britannica.com/topic/university) offer financial engineering graduate programs. - **Get your financial engineering [doctorate](https://www.britannica.com/topic/doctor-degree).** If you already have an advanced degree, earning a PhD can help you transition into the field, provided you have a rigorous background in math and the time to pursue it. The financial engineering profession prizes, but does not strictly require, a doctorate. - **Earn a quantitative finance certificate.** If you already have technical credentials, such as an engineering degree, then you may be able to jump-start your financial engineering career by [earning a certificate](https://www.britannica.com/topic/technical-education) in quantitative finance. You may need to supplement the certificate with plenty of valuable practical experience. - **Develop programming skills.** Regardless of your chosen educational path, developing robust coding skills is key to a career as a financial engineer. Languages commonly used in the finance industry include [Python](https://www.britannica.com/technology/Python-computer-language), [C++](https://www.britannica.com/technology/C-computer-language), R, and [SQL](https://www.britannica.com/technology/SQL). - **Complete one or more internships.** Landing an internship is usually critical to becoming a financial engineer. Internships offer practical work experience so you can apply academic concepts, enhance your technical skills, and become familiar with real-world financial models, data analysis, and coding tasks. ## Is financial engineering good for investors? If you remember the [2007–08 financial crisis](https://www.britannica.com/money/financial-crisis-of-2007-2008), you may wonder if financial engineering is helpful or harmful to investors. At its ugliest, financial engineering may include: - **Off-[balance-sheet](https://www.britannica.com/money/company-balance-sheet) financing** (hiding liabilities to make financial statements look healthier) - **Over-[leveraging](https://www.britannica.com/money/what-is-financial-leverage-trading)** (amplifying returns with excessive debt) - **Creative accounting** (exploiting accounting loopholes and gray areas) - **Securitization abuse** (bundling risky assets into securities and selling them as low risk) One notorious example of financial engineering from 2008 was [Lehman Brothers](https://www.britannica.com/event/bankruptcy-of-Lehman-Brothers)’ Repo 105 transactions (“repo” in this instance is short for repurchase), which reclassified short-term loans as sales at the end of each quarter. After reporting a [balance sheet](https://www.britannica.com/money/company-balance-sheet) that appeared stronger than it was, the investment bank reversed the “sales” and added the liabilities back. The accounting maneuver allowed Lehman to hide its debt, temporarily making it look financially stronger than it was and contributing to its eventual [bankruptcy](https://www.britannica.com/money/what-is-chapter-11-bankruptcy). 0 seconds of 2 minutes, 30 secondsVolume 90% Press shift question mark to access a list of keyboard shortcuts Keyboard Shortcuts EnabledDisabled Shortcuts Open/Close/ or ? Play/PauseSPACE Increase Volume↑ Decrease Volume↓ Seek Forward→ Seek Backward← Captions On/Offc Fullscreen/Exit Fullscreenf Mute/Unmutem Decrease Caption Size\- Increase Caption Size\+ or = Seek %0-9 Subtitle Settings Off English Font Color White Font Opacity 100% Font Size 100% Font Family sans-serif Character Edge None Edge Color Black Background Color Black Background Opacity 75% Window Color Black Window Opacity 0% Reset White Black Red Green Blue Yellow Magenta Cyan 100% 75% 50% 25% 200% 175% 150% 125% 100% 75% 50% Arial Courier Georgia Impact Lucida Console Tahoma Times New Roman Trebuchet MS Verdana None Raised Depressed Uniform Drop Shadow White Black Red Green Blue Yellow Magenta Cyan White Black Red Green Blue Yellow Magenta Cyan 100% 75% 50% 25% 0% White Black Red Green Blue Yellow Magenta Cyan 100% 75% 50% 25% 0% Auto360p 1080p 720p 360p 180p Live 00:00 00:00 02:30 Have you started saving toward retirement? If so, great! But how do you decide what to invest in? Encyclopædia Britannica, Inc. Should investors be alarmed about the hazards financial engineering poses? Maybe. Financial engineering can be both beneficial and risky. At its best, financial engineering may create innovative financial products, help you optimize your [investment portfolio](https://www.britannica.com/money/investment-types), and [minimize your investing risk](https://www.britannica.com/money/risk-vs-reward), which can enhance your [portfolio returns](https://www.britannica.com/money/retirement-portfolio-rebalance). At its worst, as shown by the events of 2007–08, the misuse of financial engineering can produce disastrous consequences. ## The bottom line When financial engineering is applied to make markets more [efficient, reduce risk, or provide liquidity](https://www.britannica.com/money/what-is-a-market-maker), the practice can fuel [economic growth](https://www.britannica.com/money/expansion-economics) and [personal wealth](https://www.britannica.com/money/personal-balance-sheet) creation. When financial engineering is used to sidestep accounting rules or obscure the truth, however, the opposite can happen. To protect yourself as an investor, [conduct thorough research](https://www.britannica.com/money/what-is-fundamental-analysis) to fully understand your investments, especially before adding complex financial products to your portfolio. 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 Open full sized image Currency wall: The global stakes of trade disputes. © kamui29/stock.adobe.com, © tortoon/stock.adobe.com; Photo illustration Encyclopædia Britannica, Inc News • If you’ve ever studied economics or listened to a group of economists speak, you know how hard it is to get universal agreement. But one thing they generally agree on is that [international trade](https://www.britannica.com/money/international-trade), when [structured properly, benefits all parties](https://www.britannica.com/money/comparative-advantage). Any barrier to free trade tends to shrink the overall economic pie. And yet, trade barriers—including [tariffs](https://www.britannica.com/money/tariff), subsidies, import quotas, currency devaluation, and other [protectionist policies](https://www.britannica.com/money/protectionism)—are common among even the most free-market-friendly nations. Sometimes a protectionist policy (what 18th-century economist [Adam Smith](https://www.britannica.com/biography/Adam-Smith) called a “[beggar-thy-neighbour](https://www.britannica.com/topic/Smoot-Hawley-Tariff-Act)” policy) leads to a tit-for-tat response that devolves into an all-out trade war. ## Key Points - Trade barriers can protect domestic industries but often lead to retaliation and higher costs. - Trade wars escalate tensions, disrupt economies, and can have far-reaching consequences, including recessions and supply chain disruptions. - International initiatives such as the World Trade Organization (WTO) aim to reduce trade barriers and promote stability. 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](https://www.britannica.com/money/recession-vs-depression), 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. ## Tools of the trade war: Tariffs, currency devaluation, and more **Tariffs.** Countries impose [tariffs—taxes imposed on imported goods](https://www.britannica.com/money/tariff)—to apply pressure on trading partners and encourage businesses to source goods from other nations. The [ongoing trade war between the U.S. and China](https://www.britannica.com/money/US-China-trade-war) is a prime example. The U.S. has imposed tariffs on Chinese electronics, and China has responded with tariffs on U.S. soybeans and other agricultural products. ## Historic trade conflicts - **1815–1846: Corn Laws.** Britain’s high tariffs on imported grain protected landowners but caused widespread hardship, leading to their repeal and a shift toward free trade. - **1890: The McKinley tariff.** This U.S. tariff raised import duties to unprecedented levels, protecting American industries but increasing consumer prices and sparking political backlash. - **1930: [Smoot-Hawley Tariff Act](https://www.britannica.com/topic/Smoot-Hawley-Tariff-Act).** The U.S. enacted steep import duties to protect domestic industries, but the policy exacerbated the Great Depression and worsened global trade conditions. - **1973: Arab oil embargo.** OPEC nations halted oil exports to the U.S. and others, imposing trade restrictions to achieve political goals during the Yom Kippur War. - **2018–present: [U.S.–China trade war](https://www.britannica.com/money/US-China-trade-war).** A series of escalating tariffs disrupted [supply chains](https://www.britannica.com/money/what-is-supply-chain-management), reshaped global trade patterns, and highlighted tensions between the world’s two largest economies. - **Emerging tech restrictions.** New export controls on semiconductors and [artificial intelligence](https://www.britannica.com/money/ai-rules-and-regulations) (AI) underscore the growing role of geopolitics in trade. **Currency devaluation.** Countries use currency devaluation—actions taken by a government to weaken the [value of its money](https://www.britannica.com/money/currency-exchange-rates)—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](https://www.britannica.com/money/renminbi) to offset U.S. tariffs. The tactic isn’t without its risks, including [inflation](https://www.britannica.com/money/what-is-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](https://www.britannica.com/event/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](https://www.britannica.com/topic/European-Union) (which began in 1952 as a [treaty governing the trade of coal and steel](https://www.britannica.com/topic/European-Coal-and-Steel-Community)) or the [United States–Mexico–Canada Agreement](https://www.britannica.com/event/North-American-Free-Trade-Agreement/Renegotiation#ref341037) (USMCA). Others may challenge policies through international bodies like the [World Trade Organization](https://www.britannica.com/topic/World-Trade-Organization) (WTO). These strategies can escalate disputes or pave the way for negotiation and resolution. ## From trade barrier to trade war Consider two nations, Nation A and Nation B. Suppose the world economy is booming, and Nation A believes it’s a great time to build up its automobile manufacturing industry. It may choose to restrict auto imports temporarily, even though it will mean more expensive vehicles for its consumers in the short term, and will likely upset the auto industry in Nation B. But because the overall economy is booming, neither nation feels the pinch. Now suppose, after a few years, the policy has worked so well that Nation A is able to begin exporting its vehicles to Nation B. At this point, the nations have a choice: - **Negotiate a trade agreement.** Nation A may be allowed to export cars to Nation B, but Nation A must drop its import restrictions on autos made in Nation B. Or it may ask Nation B to agree to import more agricultural products, textiles, or other goods that Nation A may produce in abundance. - **Begin a trade war.** Nation B could add a 20% tariff on autos made in Nation A. And Nation A might respond by suppressing the value of its currency relative to that of Nation B by 20%, thereby keeping its exported autos competitively priced in Nation B’s consumer market. So Nation B could raise its tariff, or add trade barriers in other areas of the economy. In extreme cases, a trade war can elicit a military response. For example, many economists and historians point to the Smoot-Hawley Tariff, which raised import duties to protect American farmers and businesses in the early days of the [Great Depression](https://www.britannica.com/event/Great-Depression), as not only exacerbating the global economic meltdown, but also contributing to the rise in extremism that culminated in World War II. ## The broader impact of trade wars ## Reshoring: Globalization in reverse In the decades after World War II, [offshoring](https://www.britannica.com/money/offshoring)—the practice of outsourcing operations from industrialized nations to those less developed—had been the trend, to the benefit of all parties involved. In recent years, supply chain disruptions, wage inflation, and national security interests prompted some industries to “deglobalize.” [Learn more about reshoring](https://www.britannica.com/money/reshoring-deglobalization) and which industries may be most affected. 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](https://www.britannica.com/money/what-is-inflation), 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. ## The bottom line Despite the prevalence of trade barriers, the international community has long recognized the benefits of reducing them. Efforts by the WTO and its predecessor, the [General Agreement on Tariffs and Trade](https://www.britannica.com/topic/General-Agreement-on-Tariffs-and-Trade) (GATT), aim to promote free trade and resolve disputes peacefully. Although not perfect, these frameworks have helped lower global tariffs, foster economic growth, and prevent trade conflicts from escalating into larger crises.