A trade war is a period of aggressively escalated tariffs and other protectionist policies that cause global economic disruption. This can strain relations between countries and in extreme cases lead to military conflict.
Donald Trump’s escalating tariffs are designed to achieve several goals. He wants to boost government revenue, encourage consumers to buy US-made goods and increase investment in the country. He also has an obsession with reducing the US trade deficit, which he claims shows that the nation is being exploited and pillaged by foreign “cheaters.”
As we’ve noted before, most economists believe that tariffs are bad for the economy. They raise consumer prices, disrupt supply chains and negatively impact world financial markets. They can also prompt businesses to relocate to lower-tariff regions or move production abroad, a process known as deglobalization that reduces productivity and competitiveness.
In a trade war, the biggest losers are those countries and industries that are most exposed to increased US tariffs. Typically, they experience declines in real exports and GDP. And because of weaker economic growth worldwide, they also face diminished demand for their products and services.
For example, Canada, China and Mexico have already imposed or plan to impose new tariffs on US goods as a result of the section 232 steel and aluminium tariffs that began on March 4. In our protectionism scenario, real fixed investment declines as investors seek higher returns in safe government bond markets and are cautious about investing in companies exposed to rising US tariff rates.
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