During the election campaign, Donald Trump derided many current trade agreements and promised to bring manufacturing jobs back to America. After his victory, he launched a protectionist campaign that threatens to end decades of lower and lower trade barriers. While a trade dispute with just a few countries (to strong-arm them into giving into favorable conditions) or regarding a specific category of goods (to protect a certain industrial sector) may be beneficial, imposing such tariffs with literally the entire world at the same time is likely to result in reduced wealth from overall lower trade, isolation and lowered negotiation power for the US.
Moreover, US tariff escalation creates a trade siege of “fortress America,” which disadvantages US exports around the globe and strengthens trade ties with everyone else. For example, our estimates suggest that a full trade war with the EU would cause the United States to lose $38.2 billion in welfare from lost US export opportunities, while China would gain $38.2 billion from new export opportunities in Europe and less expensive non-US imports.
The conflict also increases the costs of imported products for consumers, which may lead to higher inflation in local markets. It can also disrupt global supply chains and damage export-driven industries. In addition, it can deter foreign investment and harm international cooperation, with developing nations disproportionately affected. To avoid these effects, the US-China conflict should be resolved through negotiations based on WTO norms that take China’s economic weight into account.