A trade war is an adversarial interaction between nations that escalates tensions, disrupts economies and can have long-term consequences. Trade wars usually involve tariffs, but they can also include nontariff barriers, such as investment restrictions or export bans. Nontariff barriers can be especially effective in deterring trade, because they are difficult for businesses to justify and can hurt all of a nation’s citizens equally.
For example, if one country restricts the export of critical minerals that are used in the manufacturing of electronic chips or military weapons, all consumers in that nation will have to pay higher prices. This can make a product less competitive in the international marketplace, and it can also push companies away from the market.
The US and China have been in a trade war since 2018, when President Trump imposed steep tariffs on hundreds of billions of dollars of Chinese goods. He argued that the levies would decrease the US trade deficit with China, bring back manufacturing jobs to the United States and force China to reform its unfair trade practices, including intellectual property theft. These claims have proved unfounded.
As the trade war escalated, both countries imposed reciprocal tariffs. The resulting higher prices are expected to reduce demand for American products in foreign markets, which can lead to slower economic growth. This can depress stock prices, especially those of cyclical sectors like technology and energy.
In a real war, it’s wildly reckless to threaten an adversary before ensuring alternate sources of vital goods (pharmaceutical stocks, cheap electronic chips, critical minerals). The same goes for a trade war. While a trade war could be used as a negotiation tactic, the US and China’s current strategy appears to be doing more harm than good.