Donald Trump has shaken up the world’s trade system by slapping steep tariffs on goods from Europe, Canada and China and threatening new levies in a tit-for-tat escalation. That has raised costs for American consumers and could disrupt supply chains. It also threatens a global economic showdown between the world’s largest economies.
The trade war’s outcome is impossible to predict. But if the administration’s threats and bombast escalate, foreign governments will be forced to dig in and retaliate, making it difficult for Trump to back down. Even well-managed diplomacy will be hard. In addition to the complexities of negotiating with the EU, Canada and Mexico, Trump’s mercurial temperament has created the risk that he will walk away from agreements that do not give him the concessions he wants.
Moreover, there are serious risks that the trade war will spark a recession and lead to disruptions in global supply chains. The higher cost of imported goods will hit the bottom lines of companies that produce them in the United States, causing them to shed jobs and shutter plants. And the loss of jobs in export-competing industries will exacerbate a phenomenon known as “reshoring,” where companies move production to countries with lower wages.
The good news is that consumer demand has so far held down prices, and the fact that most companies have not passed on tariffs suggests that future inflation will be less severe than feared. However, the high costs of production have pushed some companies to rethink their long-term strategy, and many are now looking at shifting their operations out of the United States.
About the Author
