A trade war occurs when countries increase tariffs or other barriers to trade in order to protect their own industries from foreign competition. This protectionist policy can be driven by concerns over unfair trade practices or strategic competitors. Countries can also engage in economic conflicts to assert political influence or retaliate against rival governments.
The US-China trade conflict began in 2018 when the Trump administration accused China of intellectual property theft and other unfair trade practices. Its escalating tariffs disrupted global supply chains, raised costs for consumers and slowed economic growth.
In January, the European Union vowed to respond with new duties on American exports including motorcycles, bourbon and peanut butter. And on March 12, the US lifted the suspension of its steel and aluminum tariffs, removing exemptions for both metals and raising them to 25%.
Higher tariffs reduce output and lower incomes in exporting sectors, while consumers spend less because they’re paying more for the same goods. Skilled workers who lose jobs in exporting industries face large losses in income and consumption, while unskilled workers in import-competing sectors gain much more.
While the economy has since recovered from the turbulence created by tariff increases, the IMF warns that trade tensions could continue to weigh on global growth. And the conflict might worsen if both sides refuse to compromise, increasing the risk of further damage to the world’s largest economies and other trading partners. In the meantime, experts recommend that countries seek mutual market liberalization and rely on WTO norms for dispute settlement when disputes arise.
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