The trade war that President Trump has launched against China threatens to reshape global trade and supply chains. But the effects aren’t distributed equally. The most vulnerable are companies that make or import from China, which face higher production costs and retaliatory tariffs. They can pass some or all of the extra cost onto consumers, which reduces aggregate consumption. Workers in export-competing industries also suffer, though not as much as the general population.
Countries that run trade deficits, like the United States, spend more than they save and need to obtain vital goods from abroad—medicine stocks, cheap electronic chips, critical minerals. It’s wildly reckless to fight a war without first ensuring alternate suppliers or adequate domestic production.
Trade wars are costly to all participants, but they are particularly damaging for countries that trade more with the US. Mexico and Ireland, for example, would experience real income losses of about 2% if their trade with the United States were to be reduced by a US-imposed tariff. These losses are substantially more severe than those of China, which would experience a 0.5% decrease in real income.
A good solution is for countries to cooperate as a bloc, but that’s difficult. European leaders want to avoid higher costs for their companies in the United States, and they’re likely to try to secure an initial deal that’s acceptable to Washington. But the odds of reaching such an agreement are low. President Trump has shown little interest in resolving the issue, and China’s leadership doesn’t seem willing to back down from its demands.