Unless carefully designed, a trade war would hurt all countries involved. It would increase price uncertainty, slow global growth, depress equity prices, and reduce foreign investment in countries hit by new US tariffs. It would also raise prices for companies that use imported parts, such as US car manufacturers whose products typically cross borders several times before reaching final assembly in the United States. In addition, higher costs could push up the prices of goods consumers buy.
The Trump administration’s approach, which has been to unilaterally impose high tariffs without seeking reciprocal concessions from other countries, would be particularly harmful. It would set a dangerous precedent in which business leaders interpret the president’s behavior as an indication that the government does not respect contracts or previous commitments, and may change rules whenever it wishes. This would erode trust, and damage economic growth and the ability of firms to make long-term investments.
This is not the way to build a healthy economy. Instead, the administration should seek a win-win solution that gets its trading partners to cut their imports of Chinese products while reducing the United States’ dependence on China for vital goods like pharmaceutical drugs, cheap electronic chips, and critical minerals.
Negotiating such a deal will be challenging. It will require the United States to pressure key trading partners to adopt common external tariffs on imports from China, and in return offer them US-style exemptions. This will require diplomacy that is both skilled and credible. But even well-managed threats can backfire if Trump continues to bombast and his negotiating partners conclude that the president will not honor any agreements made.