While running for President in 2016, Donald Trump pledged to bring manufacturing jobs back to America. Once in office, he has embarked on a campaign of protectionist trade policies to do just that. While his threats may be largely empty rhetoric, the economic damage caused by a full-blown trade war is real.
Trade war creates uncertainty in global markets, disrupts supply chains, and slows economic growth worldwide. It also imposes costs on consumers, with many manufactured goods becoming more expensive as prices rise to cover the cost of higher tariffs on raw materials. The cost to households is estimated to be $200 to $300 per year, on average, before accounting for behavioral effects that include lower incomes from higher prices and consumer choices that shift production away from goods that are affected by the tariffs.
While a trade war increases costs for everyone, the impact is disproportionately felt in the country that initiates it. Initially, China’s capacity to retaliate dollar-for-dollar was limited because of its huge trade deficit with the US. But Beijing has since stepped up other tactics including export controls on critical minerals like rare earths and magnets and anti-trust probes against foreign tech giants such as Google and Nvidia.
As the trade war escalated, more and more countries began to distance themselves from the U.S., fearing they would be caught in the crossfire. The USMCA and a tentative truce in June have paused further escalation, but neither addresses the deeper structural issues at play in the rivalry between the world’s two biggest economies.