As the Trump administration escalates trade restrictions with China, the European Union, and now Japan, the world faces the risk of a global trade war. The consequences are likely to be profound.
A trade war reduces the purchasing power of consumers in the countries involved. This is because tariffs raise prices for imports (even though the President argues that demand will not fall) and reduce supply at home, as firms move production to avoid higher costs or to find other markets.
Countries that have a trade deficit—as the United States does with China and other nations—are especially vulnerable to these effects. That’s because they spend more than they save, and their consumption of non-durable goods—like food, clothing, medicine, furniture, and fuel—is not nearly as fungible or replaceable as money.
The United States’s main trading partners, like the EU and Japan, are unlikely to retaliate against the U.S. for fear of losing market share. They may, however, seek deals that offer them lower tariff rates. But these are unlikely to address Trump’s broader grievances, which include issues that fall under national—not EU—jurisdiction, such as tax regimes and export controls.
The EU’s negotiating challenges are compounded by its 27 member states’ diverse interests. Germany wants carve-outs for cars and chemicals, while France is focused on agricultural products. Poland is concerned about defense cooperation with the United States. And Irish medicine exporters, Dutch chipmakers, and Italian cheese producers all have their own concerns.
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