While running for President in 2016, Donald Trump campaigned against existing trade agreements and promised to bring manufacturing jobs back to America. Since his inauguration, the administration has engaged in an aggressive strategy of tariffs and retaliation against the economies that supply American goods and services.
This is a dangerous approach for two reasons. The first reason is that it carries the risk of spiraling escalation. If the United States were to continue raising tariff rates against China, Beijing would respond with countermeasures that raise their costs to the US, including restricting access to rare earth metals, conducting antitrust investigations of US companies in China, and increasing investment restrictions and imposing export bans. This is a recipe for almost certain defeat at enormous cost.
The second reason is that a trade war will increase prices for consumers. The terms of trade shift as a result of tariff increases, making specialisation less attractive and reducing aggregate consumption. Skilled workers who work in export-competing sectors lose significantly, while unskilled workers in import-competing sectors gain much more. In addition, the US will need to pay more for raw materials and its manufacturing production will thus become more expensive.
Countries may try to mitigate the effects of a trade war through negotiations with their trading partners and by expanding regional pacts, for example, by signing mutual recognition agreements with European Union member states. However, these measures can only go so far in reducing the impact of high tariffs and quotas on global markets.
