A trade war damages the economies of all parties involved, particularly consumers. In the short term, it slows global growth, hurting sales for American companies and causing investors to rotate out of stocks into safer assets like bonds. In the long term, it increases prices, hurting households’ bottom lines.
Ultimately, a prolonged trade war can even lead to military conflict. The Smoot-Hawley tariffs of the Great Depression triggered retaliatory attacks by other countries, culminating in World War II.
The United States can avoid a disastrous trade war by prioritizing diplomatic engagement and open communication, including backchannel diplomacy. It should also focus on the root causes of the dispute, whether that’s unfair trade practices or intellectual property concerns. Offering incentives for cooperation, such as access to new markets or joint ventures, can foster goodwill. Engaging third-party mediators, such as the WTO, can ensure neutral arbitration and reduce misunderstandings. Finally, highlighting the mutual benefits of cooperation and the costs of prolonged conflict can help shape public opinion.
In addition, it’s important to remember that a trade war can spark a recession at home and abroad. A recession reduces household income, and a drop in stock prices can trigger a “risk-off” mentality, pushing investors into safer assets like bonds and gold. Finally, higher prices for raw materials can eat into manufacturers’ profit margins, leading to price increases and reducing consumer choice. All of these factors can trigger a self-perpetuating cycle, with each additional escalation leading to further economic damage.
