What is a trade war? Is the U.S. in one after Trump’s tariffs?
Two weeks into his second term, President Donald Trump has thrust the U.S. into a new trade war. He announced steep import tariffs on Canada, Mexico, and China, the three largest trading partners of the U.S.. However, he temporarily suspended tariffs on goods from the first two countries after they agreed to bolster U.S. border security. Trump has also threatened more tariffs on other countries, putting them at risk of escalating economic conflict.
Key Facts:
- The U.S. imposed a 10% tariff on all Chinese goods, many of which were already subject to tariffs, effective at 12:01 a.m. ET on Tuesday.
- Beijing has also responded with tariffs of its own, including a 15% tariff on U.S. coal and liquefied natural gas that will take effect on Feb. 10.
- Trump gave Canada and Mexico a 30-day reprieve from 25% tariffs after they pledged to do more to stop illegal drugs and immigrants from entering the U.S.
- Canada, Mexico and China are important U.S. trading partners. In 2023, the U.S. imported $1.3 trillion worth of goods, or 43% of its total imports, according to a Washington Post analysis of U.S. Census Bureau data.
- Trump has also threatened to raise tariffs on imports from the European Union, Russia, Brazil and India.
What is a trade war?
Generally speaking, a trade war is when a government erects higher barriers to global trade to protect domestic interests, often in a retaliatory manner and with the potential for escalation.
While there is no single definition of a trade war, “the traditional understanding is that the rise of protectionism must be large enough and widespread enough to cover many areas,” said Robert Bedow, a political economist at the London School of Economics.
He said the latest tariffs — which apply to a wide range of goods from all three countries — meet the definition of a trade war. Tariffs on specific products are usually not calculated for a specific economic purpose.
In a trade war, the types of barriers that governments can impose on each other’s goods are not limited to tariffs. Non-tariff barriers include draconian bureaucracies that can stifle trade, targeting specific businesses and what Bedau calls the “nuclear option” — outright bans on specific imports.
Historically, trade wars have ended in three ways, Bidau said. First, one side unilaterally admits defeat and withdraws tariffs. Second, governments reach a deal in which both sides make concessions in certain areas. The third, and worst-case scenario, is that the conflict turns political or military, which led to World War II because of the trade wars in interwar Europe.
Why is Trump starting a trade war?
Initially, the White House characterized its move to impose high tariffs on Canada and Mexico as a move against illegal immigration and fentanyl crossing the U.S. north-south border.
Trump has claimed that Chinese fentanyl shipments have been shipped to the U.S. via Mexico and Canada, and has accused the ruling Chinese Communist Party of “subsidizing and incentivizing” companies to ship fentanyl and related chemicals to the U.S.
Beijing has denounced Trump’s accusations, arguing that the Chinese government bears no responsibility for the U.S. public health crisis.
These noneconomic goals are broader than those set by Trump during the first trade war, when he said his main intention was to reduce the U.S. trade deficit, encourage manufacturers to relocate domestically, and challenge what he called unfair trade practices by global competitors.
Tariffs on allies Canada and Mexico would also be notable for another reason: They threaten to undermine one of Trump’s signature achievements of his first term, the U.S.-Mexico-Canada Agreement, which took effect in 2020.
What does the trade war mean for everyday costs?
Higher import tariffs could lead directly to higher consumer prices, and some companies have already said they intend to pass the costs on to consumers. In the long run, trade wars could have unintended consequences, with economists warning that higher prices could stoke inflation and erode corporate profit margins.
An analysis of international trade data by the U.S. Census Bureau shows that prices for items such as cell phones, groceries and T-shirts could rise. For a typical American household, tariffs could result in a loss of about $1,200 in purchasing power each year, according to the Yale Budget Lab, a nonpartisan research center.
“Yeah, maybe,” Trump said in an interview with Truth Social. “It’s going to be a little painful, but it’s worth the cost.”
It’s hard to tell from the available data whether Trump’s first trade war has achieved its stated goal of encouraging more manufacturing jobs in the U.S. Although factory jobs increased by about 462,000, that number remained stagnant in the year before the pandemic.
How are businesses reacting?
U.S. business and labor groups have had mixed reactions to Trump’s tariff plans. Some expressed support, while others worried that it could have a negative impact on American industry.
Shawn Fine, president of the United Auto Workers, said in a statement over the weekend: “The UAW supports aggressive tariff action to protect American manufacturing jobs, which is a good first step in reversing decades of anti-labor trade policies.” At the same time, he said, “We do not support using factory workers as pawns in the fight over immigration or drug policy.”
People who have long criticized U.S. trade policy, which is committed to eliminating international trade barriers, expressed support for this. Zach Motl, president of the Alliance for a Prosperous America, said: “President Trump’s decision to impose comprehensive tariffs is a bold and necessary move to reverse decades of failed trade policies and rebuild American manufacturing and agriculture.”
The new tariff threat was strongly condemned by U.S. trading partners, including the European Union, and Trump also promised to impose tariffs on the European Union in the future. The European Commission said in written comments on Sunday evening: “Broad tariff measures increase trade costs and harm the interests of workers and consumers. Tariffs will cause unnecessary economic disruption and lead to inflation. This is harmful to all parties.” The European Commission vowed to take countermeasures. . If new tariffs are imposed.
