A trade war is bad for all parties, but especially hurts those in export-competing sectors. In the short run, they see large losses in consumption, while unskilled workers in import-competing sectors hardly lose at all and actually gain in consumption. In the long run, however, aggregate consumption falls due to higher tariffs, so skilled and unskilled workers both experience large losses in income and consumption.
During his campaign, Trump pledged to launch a trade war “bigger than anything we’ve ever seen before.” Since taking office, he has repeatedly raised the stakes, targeting the EU and threatening to impose a blanket 30% tariff on all European goods. In recent weeks, he has even threatened to target China, the world’s second-largest economy.
The EU is divided over how to respond. Some members want carve-outs for their industries (Germany, cars; France, agriculture); others are pushing for confrontation. The EU’s negotiating dilemma is compounded by the fact that Trump’s grievances extend beyond tariff rates, to non-trade issues like tax regimes and national security concerns—areas under domestic rather than European authority.
As the trade war escalates, countries will use both tariffs and non-tariff barriers to protect their markets—in addition to retaliating against each other’s policies through the World Trade Organization or other organizations. Ultimately, a full-scale trade war is likely to reduce global economic growth and hurt almost all nations and households. But the resulting damage may not be as severe as many accounts suggest.