When countries impose or increase tariffs and other nontariff barriers against each other, it’s called a trade war. It typically arises from extreme economic protectionism and usually features a tit-for-tat of increasing tariff rates. But the US and China are also deploying other nontariff measures, such as export bans on rare earths and antitrust investigations of tech companies like Apple.
As a result of the Trump administration’s new tariffs, firms that bring goods into the United States will have to pay more tax. Some will pass this extra cost on to their customers, while others may decide to import fewer goods. Consumers will see higher prices for foreign goods, from bananas and coffee to Japanese video game consoles.
Trade wars are bad for the overall economy because they disrupt global supply chains and lead to higher consumer prices. But disaggregating the distributional effects shows that skilled workers in export-competing sectors lose significantly from a trade war. In contrast, unskilled workers in import-competing sectors experience gains in consumption.
A growing number of economists are concerned that a trade war could trigger a global recession. This concern stems from the fact that a trade war would reduce consumer spending and investment, which in turn could cause countries to lower their interest rates in an effort to stimulate growth. In addition, the increased uncertainty caused by a trade war could deter business investment. As a result, some countries might end up cutting their deficits or even defaulting on their debt.