The term trade war refers to an escalation of economic tensions that may disrupt supply chains and cause turmoil in global markets. Many economists believe that these types of conflicts have large negative effects and should be avoided. However, it is not always possible to avoid them because sometimes nations put their own interests ahead of others’, particularly when a nation is faced with a crisis or faces political instability. There are also noneconomic reasons that can lead a country to promote a trade policy that benefits certain political insiders at the expense of other citizens, such as national security or the need to protect business secrets.
During his presidential campaign, Donald Trump expressed disdain for most current trade agreements and promised to bring manufacturing jobs back home from countries like China. After his election, he began an expansive protectionist campaign, imposing steep import tariffs to protect domestic industries and arguing that America was being taken advantage of by foreign countries.
Tariffs raise the price of goods and services from abroad by increasing the amount that firms must pay to buy them. Businesses can pass some or all of the higher prices to consumers, who experience a loss in purchasing power and in economic output. This reduction in economic output reduces after-tax incomes for workers and owners of capital, reducing incentives to work or invest.
In response to the US threat of reciprocal tariffs, several large trading partners offered concessions in an attempt to appease the White House and avoid a full-scale trade war. But it is not clear that the Trump administration will budge from its insistence on balanced trade as well as other concessions from other countries. The next step for the US could be a range of nontariff barriers, including export bans and restrictions on investment.
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