When countries restrict trade with each other, prices typically rise for consumers, industries that rely on imported materials suffer, and global supply chains get disrupted. In extreme cases, these conflicts can even elicit a military response. The beggar-thy-neighbor tariffs of the Great Depression and the resulting world war may be the most famous examples, but the problem has persisted ever since: As the economy becomes more globalized, political leaders are increasingly tempted to safeguard local jobs and businesses by adding extra taxes (called tariffs) or limiting how much can be imported.
When one country imposes new tariffs on imports, other nations often respond by raising their own. The end result is a “trade war” in which both sides face higher costs and decreased economic growth.
The Trump administration’s escalating trade battles with China, for example, have made American products more expensive in Chinese markets and hurt the US manufacturing sector. This has led some companies to shift their operations abroad, a process called “deglobalization.”
But the impact goes far beyond individual industries. When countries levy tariffs, they often pass those costs onto their consumers, making everyday items like smartphones and computers more expensive. The increased costs, in turn, can drive up inflation and reduce purchasing power.
Tariffs can also disrupt global supply chains and lead to slowing economic growth, as manufacturers delay orders and adjust their production processes to mitigate the effects of the higher costs. Some workers in the affected industries may even lose their jobs. And if the conflict drags on, investors will become less confident about the economic prospects of both countries and will hold back investments.
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