When a trade war occurs, tariffs rise, exports drop, and prices for both imports and domestic goods go up. The result can be economic turmoil and supply chain disruptions.
While the global economy can withstand some of these shocks, prolonged trade frictions are bad news. This is why it’s important for governments to avoid imposing protectionism that escalates global trade conflicts.
In his 2016 campaign, Trump was critical of current trade agreements and promised to bring manufacturing jobs back to the United States. But his actions are reshaping global trade, particularly supply chains, in a way that will negatively impact many American consumers and businesses.
US tariffs are expected to raise the cost of imported goods and reduce demand. Economists use a calculation called “the elasticity of imports” to estimate how much demand will fall for a one percent increase in their price. This number is around 4. Typically, when tariffs are imposed, demand for imported goods declines by an amount equal to the tariffs.
A trade war between the world’s two largest economies will have broad consequences, affecting everything from soybeans to lithium-ion batteries. Some countries, such as the EU and India, are reluctant to retaliate against Trump’s new tariffs. But others, such as China and Russia, have already retaliated. This makes it even more crucial for the US to negotiate new trade deals. In addition to reducing trade barriers, these agreements should include provisions that address important and sensitive economic issues like the rules governing what constitutes a country’s “rule of origin” for the purpose of determining tariffs.