A trade war is an economic conflict in which nations impose and increase tariffs and other nontariff barriers against each other. It can lead to reduced global economic growth, political instability, and violence in some cases, as demonstrated by the Smoot-Hawley Tariff that raised import duties to protect American farmers in the early 1930s and triggered the Great Depression.
Nations often use tariffs and other trade barriers to exert leverage over their trading partners, attempting to gain an advantage in the marketplace. But, as the US and China show in their current trade dispute, raising these taxes can lead to retaliation by trading partners, making the situation more difficult for all.
When one nation raises its own tariffs, the firms that make and sell goods to the country are forced to pass some or all of the increased costs onto consumers. These consumers are likely to buy fewer goods from the affected nation, and they may switch to competing products that are available at lower prices elsewhere in the world.
The same is true of trade barriers such as embargoes and export restrictions, which can halt or restrict the flow of goods to achieve political goals. A more disaggregated perspective, however, shows that some workers can benefit from a trade war despite the overall negative impacts. That’s particularly the case for unskilled workers with short-term horizons, who benefit from higher tariffs even when they are bad for the economy as a whole.