A trade war is a battle of supply chains. Manufacturers rely on imported components to produce their final goods, and tariffs raise the cost of those inputs. These higher costs reduce domestic production and output, and also make American products less competitive in third countries. The resulting contraction in global trade hurts all parties. A sustained trade war lowers real GDP worldwide by about 1.4% this year, 1.5% in 2020, and 2.1% in 2021.
The Trump administration’s tactics have exacerbated those effects. In a trade war, the loser is not just the target country’s exports but all global trade and GDP.
Even in the unlikely event that US-China trade can be decoupled, there will still be a global economic slowdown. The world’s largest two economies account for more than half of global economic output and exports. Their tariffs and other protectionist measures lead to a contraction in global real GDP of about 0.1% this year, 0.8% next year, and 1.4% in 2022.
The EU, America’s top foreign export market, wants to limit the damage by negotiating an interim arrangement with Washington that would include baseline tariffs of at least 10% (varying by sector) but with special carve-outs for sensitive products such as vehicles and aircraft. In exchange, it would offer to buy more U.S. liquefied natural gas, oil, weapons, and agricultural goods. But the administration keeps shifting its position, and the EU’s negotiators are in no hurry to move ahead.