A trade war escalates tensions, disrupts economies and can have far-reaching effects, including recessions and supply chain disruptions. Trade wars are typically triggered by one nation raising tariff rates on another to gain an advantage in the market, but there are other reasons for nations to initiate or escalate a trade conflict, such as political considerations.
The United States and China’s trade war began in 2018 when President Trump imposed tariffs on Chinese imports. The Chinese responded with tariffs on US goods such as whiskey and motorcycles. The trade war threatens to hurt all countries by reducing demand for their exports, but there are particular economic and political implications for the US and China.
Many economists believe that higher trade barriers hinder the benefits of economic specialization, which means that a country cannot reap the full gains from specializing in manufacturing or other high-value products. There are also noneconomic considerations, such as a desire to protect trade secrets or national security, that can influence a nation’s policy.
When a trade war is initiated, the terms-of-trade externality no longer works and aggregate consumption declines. Skilled workers in export-competing sectors suffer more than unskilled workers in import-competing sectors, but even skilled US workers will experience a reduction in income and spending as a result of the tariff increases.
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