Modelling trade war between two countries under the international division of Labour

This study aims to determine the trigger conditions behind trade wars and explore the prerequisites required to institute trade subsidies. Additionally, it investigates the potential effectiveness of both a trade war and a trade subsidy within an economic framework shaped by the international division of labor, particularly focusing on intermediate goods production. The study formulates a theoretical model for trade wars and derives three crucial findings. Firstly, it establishes that a critical condition for triggering a trade war hinges on maintaining a balanced self-price coefficient of demand, neither excessively large nor small relative to the cross-price coefficient of demand. Secondly, failure to meet this condition would preclude the occurrence of a trade war; instead, it would prompt the emergence of trade subsidies and reciprocal actions between the two countries involved. Lastly, the scale of the trade war or a trade subsidy in this study is not influential in the countries of trade war. Therefore, this study recommends that changing the current market structure of the international division of labor would be necessary to make the trade war or trade subsidies effective.