When countries fight back in a trade war, they impose tariffs and other restrictions on each other, which hurts the economy of both nations. Tariffs increase the cost of imports and cause domestic prices to rise, which can fuel inflation. They also disrupt global supply chains and impact world financial markets. In the worst cases, these disputes can strain relations between countries and even lead to military conflict.
During his campaign, President Trump disdained many current trade agreements and promised to bring manufacturing jobs back to the United States. He has since launched a series of attacks on China, accusing the country of unfair trade practices and intellectual property theft. China has responded with a series of retaliatory tariffs.
While there are legitimate reasons to restrict trade, many countries use restrictions to leverage broader political disagreements or to protect strategic industries. These policies often escalate into a cycle of reprisals that can erode economic growth and create long-lasting damage.
When the Tax Foundation models a trade war, we find that consumers pay a higher price for imported goods as a result of new tariffs. The tariffs also reduce federal income tax revenue, because they decrease economic output and consumer spending. Skilled workers, who tend to be employed in companies that rely heavily on imported inputs, experience especially negative effects. In the long run, consumption declines for all workers in our model trade war scenario, but skilled workers’ consumption falls much more than unskilled workers’.
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