A trade war would affect everyone, but manufacturing and agriculture (which account for a majority of global exports) are most exposed. They are based on imported inputs, so tariffs increase costs and reduce production. Uncertainty prompts consumers and businesses to hold back spending, which slows economic growth and job creation.
During the 2016 campaign, President Trump criticized many current trade agreements and promised to bring jobs back to the United States. He then imposed tariffs on billions of dollars worth of Chinese goods, hoping to decrease the trade deficit and force China to reform its trade practices, including intellectual property theft. However, few of his promises have materialized. Meanwhile, Beijing has retaliated with its own tariffs and nontariff barriers, such as export bans on rare earths and antitrust investigations of US companies like Google and Nvidia.
As the trade war continues, we expect the Trump administration to continue escalating tariffs. But he could be restrained by the need to raise revenue for the big tax bill that is being negotiated in Congress. If he settles on a level of tariff rates and sticks to it, then it is possible that the overall impact will be limited.
Regardless of whether he reaches a deal with Beijing or digs in for a protracted conflict, the US’s trading partners will have to choose between taking Washington seriously and negotiating a favourable deal. Those that take the former path will probably see their tariffs lowered or eliminated, while those that prefer the latter will pay the price with lower exports.