When a country imposes tariffs and other restrictions on imports from other countries, the process is called a trade war. A trade war can have profound effects on global economic activity, especially when the involved nations are major powers with powerful economies and close political and security ties.
During the 2016 presidential campaign, Donald Trump spoke against many current trade agreements and promised to bring manufacturing jobs back to America. After becoming president, he has upended the multilateral trading system by threatening to pull out of the World Trade Organization and embracing core mercantilist tenets such as the belief that trade deficits do profound economic harm and that governments should intervene forcefully to prevent domestic businesses and consumers from engaging in commercial exchanges with foreign suppliers of goods and services that aren’t in their own interests.
The first salvos of the US-China trade war have included imposing steep tariffs on Chinese goods and retaliating against China for doing the same. The effect has been to increase tariff rates, which hurts consumers, and to reduce overall trade. Tariffs aren’t the only type of trade barriers: Countries also use quotas to limit imports, subsidies to support domestic producers, and regulations to block foreign competition.
In the long run, higher import tariffs reduce overall consumption and GDP. But the distribution of these costs and benefits is not always clear, as workers in exporting sectors lose much more than those in import-competing sectors. This means that unskilled workers might actually prefer high tariffs if they have a short time horizon.