A trade war occurs when countries attack each other’s exports using taxes and quotas. For example, Nation A may add a tariff on auto imports from Nation B, causing Nation B to do the same in a tit-for-tat escalation. This raises the cost of vehicles in Nation B, reducing their appeal to consumers and pushing up the price for cars made in Nation A.
Trade wars often escalate tensions, disrupt global supply chains, and increase costs for consumers. They can also weaken international cooperation and damage diplomatic relations. In addition, they can hurt domestic companies reliant on international sales and export-driven economies. Developing nations can be disproportionately affected.
Countries may initiate a trade war over concerns about unfair trading practices, such as intellectual property theft or forced technology transfers. They may also cite national security concerns, especially when foreign goods or investments are perceived to threaten key industries or technological capabilities.
While a trade war increases the cost of imported goods, it can also lead to job losses at businesses that rely on international sales. It can also affect investment flows and cause disruptions in global supply chains. And if a trade war continues to escalate, it can create volatility in financial markets and affect economic growth worldwide. According to Tax Foundation estimates, US households pay an additional $625 each year in higher tariffs before accounting for behavioral effects. This is because households spend less when purchasing goods and services that face higher prices, and because they are forced to switch to alternatives that don’t incur high tariffs.