A trade war occurs when nations implement and increase tariffs and other non-tariff barriers against each other. The result is reduced economic output and employment and higher consumer prices.
Trump launched his trade war with China by imposing a range of tariffs on Chinese imports in 2018. The US economy has been negatively affected ever since, and the impact is expected to intensify if the United States and Beijing continue to escalate their conflict.
The US government argues that the trade war has been a success, based on an apparent drop in the trade deficit with China. However, the underlying dynamics are more complex than the US administration claims. For example, the alleged reduction in the trade deficit may actually reflect increased Chinese tariff evasion.
In addition, the US economy has been weakened by higher prices for imported goods. This has reduced the disposable incomes of workers and owners of capital, making them less likely to spend or invest. This reduces production and employment, and the overall economy shrinks.
The US and other countries have also been harmed by the trade war, through lost opportunities to sell their products in China. But the impact on China has been particularly severe. It has lost a large amount of international prestige and the ability to trade freely with other economies. As a result, China has resorted to domestic policies that aim to counteract these foreign losses. This includes expanding its own market through the Belt and Road Initiative, limiting access of American companies to Chinese markets, and investing in strategic technologies to prevent the digital modernization of the country’s industry.