The Trade war has lurched from fragile truce to bare-knuckle brawl. New port fees kicking in Tuesday could raise costs further on Chinese goods and ultimately reduce imports from Asia. This is exactly the kind of economic damage that the Trump administration says it is trying to avoid.
The United States benefits from the global economy, and a trade war hurts its own economy. Countries facing higher tariffs on their exports see declines in real GDP. They also face weaker demand for their exports from other countries. This dampens economic growth and slows investment and industrial production. Monetary policy responses may also amplify these effects, and that may dampen global equity prices.
In a trade war, workers employed in export-competing sectors lose much more than those working in import-competing industries. This is one reason why disaggregating the effects of a trade war helps to shed light on the nature of its impact on the economy.
As a result, the United States can only benefit from a quick end to the trade war and some form of a grand bargain that rebalances the global trading system. In the meantime, we expect a continued economic downturn and lower corporate tax revenue. This will likely thwart the Fed’s attempts to ease monetary policy and potentially boost long-term interest rates.
It is hard to imagine a quick end to the trade war, especially given that President Trump has already threatened to pull the United States out of the World Trade Organization (WTO). This would create further uncertainty and escalate the dispute. For its part, the EU has many competing interests and is split on whether to fight or compromise. Germany wants carve-outs for its automotive industry, France has an eye toward agriculture, and Poland is wary of damaging transatlantic defense cooperation.