A trade war is a global conflict that results from protectionist policies such as tariffs, quotas, and export restrictions. These tactics can disrupt supply chains, raise prices for consumers, and strain international cooperation. While nations may use them to address specific economic or political goals, trade barriers often end up harming everyone.
As a result, countries typically respond with more protectionism in return, which escalates the conflict. While some workers in protected industries benefit, overall economic welfare is harmed as global trade slows and prices rise.
While the US government could reap benefits from higher tax revenues, other costs are likely to outweigh these gains. For example, the increase in prices due to retaliatory tariffs reduces household incomes and constrains spending on durable goods. This can also reduce economic growth, which in turn cuts federal revenue.
Moreover, as economies adjust to higher prices and reduced investment, the inflationary impact of trade wars can delay additional Fed monetary stimulus and push up long-term interest rates. Rising interest rates can cause financial stress and restrain new credit flows, which in turn can slow manufacturing production and trade.
In addition, a trade war will make other governments more willing to maintain or even raise their own tariffs in response to the US. This can further reduce US economic output and stifle global trade. As a result, the net effect of the Trump administration’s actions is likely to be negative for the economy and for most households.