When one country imposes tariffs on the exports of another, it causes the price of the imported goods to rise. This increases the costs of doing business, which are passed on to consumers. It also reduces the competitiveness of the domestic goods, and thus, reduces local GDP growth.
During his campaign for President, Donald Trump disdained many current trade agreements and promised to bring manufacturing jobs back to the US. Since taking office, he has ramped up the protectionist pressure and threatened to pull the United States out of the World Trade Organization (WTO), an impartial international entity that regulates and arbitrates trade among the 160 countries that are members.
In a typical trade war, the target country raises its own import tariffs to reduce the terms of trade and then expects its trading partners to retaliate with similar increases in their own import tariffs. But this logic is flawed. In this scenario, both sides lose: the attacker suffers from reduced productive efficiency and consumers pay higher prices for their imported goods.
While a trade war might make sense as a tool for reducing China’s dependence on foreign firms, it is risky and will ultimately prove to be costly. A sustained embargo-level trade war would cost the United States about 2.5 percent of its GDP and China about 2.1 percent. Business leaders who focus too narrowly on tariffs risk missing a larger shift in China’s economic strategy—centered on reducing its dependency on the global economy.
About the Author
