Trade war is a form of economic conflict in which countries implement and increase tariffs and other nontariff barriers against each other. It typically arises from extreme economic protectionism and features so-called tit-for-tat measures, where each side increases tariffs in response to the other’s moves. In the case of China-US trade, a sustained embargo of bilateral trade would have devastating consequences, and both sides risked destabilizing global economic growth.
Blocking trade reduces a nation’s real income and purchasing power, so countries that export tend to lose and those that import suffer as their demand falls. But even those that are net exporters aren’t immune: They may lose through supply chain disruptions and from weaker global economic growth (which is what we forecast in our protectionism scenario).
Unilateral tariff hikes create a pernicious type of uncertainty that undermines confidence and makes companies less likely to invest and spend. The Trump administration’s disregard for contracts and rules erodes trust, making it hard to find a path to de-escalation.
Countries that rely more on exports to the United States are most vulnerable. In our simulations, a sustained embargo of US-China trade would cut China’s real GDP by about 2.5 percent and shrink employment in its manufacturing sector by nearly 1 million workers. Other countries would see losses corresponding to their proportion of trade with the US: Canada would lose 2.5%, Mexico 2.7%, and Ireland 3.0%. Workers in export-competing sectors generally suffer more than those in import-competing ones, although unskilled jobs are less affected.