As manufacturing and agriculture dominate international trade, tariffs have a big impact on prices (and job growth). Uncertainty about how long the war will last also slows consumption and investment. Fortunately, the service sector, which makes up 70% of our economy, is less sensitive to tariffs. But the uncertainty is hurting consumers and causing many businesses to delay investments, and that will also slow economic activity.
President Trump campaigned on a protectionist platform, promising to bring jobs back to America from China and elsewhere by imposing steep tariffs. Since winning the election, he has launched a series of unilateral actions and threatened to pull out of the World Trade Organization, an impartial body that regulates and arbitrates trade among 160 countries.
But he faces a major challenge: world leaders are largely standing up to the White House’s threats. They are unlikely to succumb to pressure from their own constituents to lower tariff rates, and even if they did, they might find it politically difficult to negotiate with Trump’s deeply unpopular administration.
That makes it all the more important to avoid a full-scale trade war, at least in the short term. Instead, US officials should try to design a trade deal that gets partners to reduce their imports from China, in exchange for exemptions from new U.S. blanket tariffs. That is a far more realistic strategy than threatening to fight a trade war before making sure that the U.S. has alternate sources of vital goods (e.g., pharmaceutical stocks, cheap electronic chips, and critical minerals) that cannot be easily replaced or made at home.