Countries often fight a trade war when they seek to protect domestic industries from cheaper foreign imports. The conflict can disrupt global supply chains and raise costs for consumers. It can also destabilize the financial markets. In a globalized world, these conflicts can spread rapidly across economies and create new barriers to international economic cooperation.
Trade wars usually start when governments impose extra taxes (called tariffs) on imported goods to make them more expensive. This makes the domestic products more attractive and encourages people to buy them instead. But imposing large tariff walls can have unforeseen consequences. For example, the US-China tariff war could lead to increased protectionist policies around the world, limiting global supply chains and hampering global growth.
As a result, the overall impact of trade war is likely to be negative. The US economy and stock market would take a hit, but workers in export-competing sectors may lose more than unskilled workers in import-competing sectors.
Since the end of 2025, the Trump administration has imposed or threatened tariffs totaling more than $330 billion. These tariffs reduce US economic output, incomes, and tax revenues on a dynamic basis by about 0.2 percent and $132 billion, respectively. The dynamic effect reflects the impact of retaliation by other countries, which reduces U.S. economic output and incomes even more. Nevertheless, the Trump administration’s deep unpopularity abroad gives world leaders little incentive to cave in and negotiate with it. Instead, the Trump administration’s tactics have prompted foreign leaders to retaliate in an attempt to counter its coercive threat.
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