As the name suggests, a trade war is a conflict between two nations over exports and imports. Nations often have a trade deficit, which is when they spend more on imported goods than they make selling them abroad, so trade wars can be an effort to balance this imbalance. They can also be used as a weapon to achieve political goals. For example, the British fought a series of opium wars with China in the 19th century because they wanted to control the Chinese opium market and use it as leverage over a number of important issues.
Trade wars can be a serious threat to economic growth and stability, which is why economists are so concerned about the current one between the United States and China. They say the tariffs that President Trump has imposed and threatened to impose will reduce U.S. economic growth by 0.23 percentage points in 2025 and by 0.62 percentage points in 2026, while raising inflation temporarily to a rate of about 1 percentage point above baseline.
Another concern is that the tariffs will disrupt global supply chains and push up prices for consumers, which could slow consumer spending. In addition, the tariffs will hurt businesses that rely on global production and will cut into the profits of foreign companies that sell into the United States.
Even after accounting for behavioral effects, such as firms cutting jobs and raising prices to offset the costs of the tariffs, we estimate that on average the trade war tariffs will increase the cost of living to US households by $200 to $300 per year, or about 6 percent of their disposable incomes. This is on top of the lost GDP from reduced output and investment.
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