A trade war is a conflict in which countries use tariffs and other barriers to hurt each other’s economies. Trade conflicts can damage global supply chains and raise consumer prices. They can also escalate as the parties exchange threats and retaliate against each other.
Trade wars can be difficult to win. If one country imposes extra taxes on imported goods (called tariffs), its trading partners will respond with their own tariffs. This back-and-forth can harm industries that weren’t even part of the original trade conflict, as well as consumers.
In the US, for example, the Trump administration is using tariffs to pressure its trading partners to address its economic grievances. The administration wants its trading partners to reduce the gap between the value of goods it buys from them and those it sells them, increase American investment in China, and allow the United States to reclaim the Panama Canal, among other goals.
When the United States imposes tariffs, its trading partners retaliate in kind, harming US-based companies that export to those markets. This can lead to reduced sales and revenue for affected firms, including from sectors like agriculture, aerospace, and industrials.
In addition to the direct effects of higher tariff rates, trade wars can also reduce aggregate consumption by raising prices for imported goods and reducing workers’ incomes. Skilled workers in export-competing industries are generally more likely to suffer from these indirect effects than unskilled workers in import-competing industries.