A trade war is an economic conflict characterized by countries increasing tariffs and other non-tariff barriers against each other. It is often initiated by extreme economic protectionism, such as embargoes or export restrictions (which limit the sale of critical goods to achieve political aims). These barriers reduce global trade and can trigger retaliation that escalates tension between nations.
During his campaign for president, Donald Trump disdained many current trade agreements and promised to bring manufacturing jobs back to the United States from abroad. He launched a wave of protectionist policies and threatened to pull the US out of the World Trade Organization, an impartial international body that regulates and arbitrates trade disputes.
In theory, tariffs reduce trade deficits by raising the cost of imported goods and encouraging businesses to buy domestically-made products, which boosts local economies. They also allow countries to exert leverage during trade negotiations by forcing other nations to agree to more favorable terms for a deal. In practice, however, these costs are passed on to consumers in the form of higher prices.
The trade war that began on April 10 combines US tariffs on steel and aluminum with foreign retaliatory measures. The retaliation affects $330 billion worth of US exports. We model the impact of these imposed and threatened tariffs on a dynamic basis, which reflects their effect on US economic output, incomes, and related tax revenues. As shown in the figure below, we expect a full round of retaliatory tariffs to lower US 10-year GDP growth by 0.2% and reduce tax revenues by $132 billion on a dynamic basis.
About the Author
