As a candidate for president in 2016, Donald Trump railed against free trade agreements that he deemed unfair. He promised to bring manufacturing jobs back to America and embarked on a protectionist campaign. The campaign has led to a slew of new tariffs that he claims are necessary to combat unfair trade practices.
A trade war can have a number of negative impacts on the economy. The biggest is that it can lead to higher prices for consumers, reducing their after-tax income. In addition, higher tariffs can make parts and materials more expensive for manufacturers. This can also reduce private sector output, lowering overall economic activity.
In an extreme scenario, a trade war can elicit a military response from the other party. This is what happened when the Smoot-Hawley Tariff increased import taxes to protect American farmers in the early 1930s. This contributed to a global economic meltdown and sparked the rise of extremism that led to World War II.
During a truce in March, Trump and Xi agreed to halt new tariffs while they work toward a trade agreement. However, tariffs remain in place on many goods imported from China. And a US court has ruled that the president’s authority to impose tariffs on a whim is not constitutional. If this ruling stands, the president’s ability to levy tariffs could be reduced drastically. This could have a direct effect on the economy as it may limit his ability to take action against China, especially since the court case will be heard by the Supreme Court next month.