Trade war
A trade war is a dispute between countries over imports and exports. It can result in higher prices for consumers and slower economic growth. It can also damage global supply chains and hurt domestic businesses that rely on international trade for revenue. The US-China trade war grew out of the United States’ concerns over intellectual property theft and unfair trading practices by China. Throughout 2018, the two nations imposed and threatened tariffs on each other’s goods, leading to a disruption of supply chains and slowing global economies. In January 2020, the two nations reached a Phase One agreement under which China agreed to purchase $200 billion in U.S. goods in return for reduced tariffs.
While there may be winners from protecting certain industries in a trade war, overall economic activity is slowed. This is mainly because higher tariffs reduce consumer spending and businesses’ profits. They also slow new credit flows, which in turn restricts investment, industrial production and trade. In addition, policy uncertainty can have a significant negative impact on asset prices.
In our protectionism scenario, the level of global real GDP declines by 0.1% this year and 0.8% in 2019, compared to our baseline forecast. Workers whose jobs depend on importing goods suffer more than those who work in export-driven sectors, because their consumption is lower in this scenario. Skilled workers also suffer more than unskilled workers. In the long run, these effects outweigh any benefits from trade diversion to avoid tariffs.