A trade war occurs when two countries make it harder or more expensive to buy each other’s products by adding extra taxes called tariffs. The purpose of these conflicts is usually to protect local industries from foreign competition, and in a globalized economy they can affect companies and consumers around the world. For example, the U.S.-China trade war of 2018 centered on technology and manufacturing, but it also disrupted supply chains in agriculture and hurt farmers in both countries.
When a country begins a trade war, it can expect retaliation from its trading partners. China, for example, hit back with taxes on American soybeans and pork, which are from regions that voted for Trump in 2016. In general, the more a trade war escalates, the worse it is for both economies.
The main reason for this is that imports fall after tariffs are imposed, and the companies that rely on them have to pay more for their materials, which cuts into their profits. They may then pass the cost on to consumers, which can be a big burden for lower-income households. In fact, a study published in the Quarterly Journal of Economics in February 2020 found that the average American household faced about 3 percent higher costs because of the Trump administration’s trade war with China.
The trade war with China has led to a sharp slowdown in Chinese growth, which could weaken the rest of the world’s economic prospects. It is unclear whether the leaders of both nations will be able to strike a deal that reduces or eliminates tariffs. In the meantime, smaller economies can still strike trade agreements with each other—though those deals will generally not be as large as ones with the United States.