Trade war:
A trade dispute between two countries that escalates to the point of a damaging economic conflict. A trade war typically involves high tariffs, so-called tit-for-tat restrictions, and protectionism. It can harm the global economy and hurt domestic businesses and consumers.
During his campaign, President Trump expressed disdain for many current trade agreements and promised to bring manufacturing jobs back to the United States. Since becoming president, he has imposed tariffs on imported steel and aluminum. He also threatened to pull the US out of the World Trade Organization, an impartial international body that regulates and arbitrates trade among 160 countries.
The US and China are the largest economies in the world and the risks of an all-out trade war are enormous. But a negotiated settlement that includes some form of market access, intellectual property protections, and technology transfer may be possible. The chances of a quick and sweet deal are low, however, as both sides remain entrenched in their positions.
A broader trade war would damage the global economy as nations impose more and higher tariffs in response to one another. Consumers in countries that impose tariffs lose, as do workers in exporting sectors. Domestic companies that rely on imported raw materials also face higher costs and reduced sales growth. In the long run, a trade war undermines global productivity by distorting price signals and inhibiting the specialization that maximizes global production.
Some countries, such as the European Union, are seeking carve-outs from the US’s tariff threats. But, given Trump’s inclination to escalate further, a trade war could result in higher tariff rates on EU goods. This in turn would raise prices for households, and lead to a loss of confidence in the economy’s future.
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