Trump has shown he will backtrack on tariffs. What does that say about how to wage a trade war?
- Written by Antonio Navas, Senior Lecturer in Economics, University of Sheffield
Amid Donald Trump’s escalating tariff war with China, the world has been left in no doubt. Consistent with his campaign messaging, and going against the overwhelming majority of economists’ advice, it’s clear that the US president still loves tariffs. He is ready to use them as a bargaining tool – and also to change them on a whim.
Countries responded to the tariffs announced on “liberation day”[1] in different ways – before Trump backtracked and announced a 90-day pause[2]. But China – which was not granted the pause – refused to back down. It hit back with extra tariffs of its own on US imports, affecting mainly agricultural goods[3].
Before Trump announced the delay, the EU had also shown it was prepared to hit back[4] (before climbing down itself in response to the pause). Meanwhile Canada[5] had initially retaliated angrily with tariffs and consumer boycotts[6].
This contrasts with the muted response of the UK government, despite the tariff on steel[7] clearly affecting its economy[8]. “Cool heads”[9] are one thing. But knowing what we do now about how easily Trump changes his mind on this matter, is the UK following the right course of action?
Economists have long studied the impact of trade wars and find no good news for the countries involved. Studies[10] suggest that trade wars end up in high tariffs that are damaging to consumers in both of the nations involved.
Recent studies of the 2018 US-China trade war, initiated by Trump, document that US citizens have suffered significantly[11] since that time. The tariff was mostly passed on to US consumers, resulting in higher prices and less choice for shoppers. These offset any gains in government revenue and competitive advantage for domestic producers.
Other evidence[12] suggests that there was a significant decline in Chinese economic activity in sectors for which the US tariffs were introduced, such as solar panels and washing machines.
So there’s clearly a lot to lose for both sides. Imposing tariffs on foreign goods may damage a nation’s own consumers. If that country is thinking of counterattacking with retaliatory tariffs, then it must consider what its ultimate goals are. It must also think of the price it is prepared to pay.
Among the potential goals, two stand out. First, to convince the country initiating the trade war to drop its tariffs. And second, to avoid tariffs from other countries in future.
An effective tariff retaliation should target selected goods. This minimises the negative impacts in the domestic economy and maximises the harm to the foreign economy. It can be achieved by targeting goods that have easy substitutes in the domestic economy – an example might be scotch whisky as a substitute for bourbon in the UK.
And they should target products that are supported by powerful lobbies in the rival country. That could be, for example, sugar or soybeans[13] in the US. When their sectors are hit, these lobby groups[14] can flex their muscles to press governments for change or demand subsidies to cover their losses.
But there can also be complicating factors – governments should be aware of global value chains and interlinked production between countries when targeting goods.
Studies[15] published after the first Trump administration found[16] that in response to Trump’s 2018 tariffs, countries retaliated by targeting goods that could easily be substituted in their economies and which would hurt Trump’s voter base.
This appears to mirror what the EU outlined in its now-paused retaliation plans, by slapping tariffs on key exports from states that voted for Trump in 2024. These products included soybeans, tobacco and steel. The bloc has also been considering new taxes against big US tech firms[17].
This retaliatory strategy should increase pressure on the country that initiated the trade war to drop their initial tariffs. In theory, at least.
The first US-China trade war, which resulted in five waves of tariffs and subsequent retaliations, concluded with a trade deal[19] in January 2020. Under the deal, the US cut some of the tariffs and China committed to increase US imports by US$200 billion (£151 billion) over the next two years.
It is difficult to say whether retaliatory tariffs played a role in the de-escalation of US-China tensions. But US businesses and consumers could indeed have felt the pain[20] from tariffs on Chinese goods. This may have influenced the US’s willingness to negotiate.
In a parallel trade war over US steel and aluminium in 2018, the EU imposed retaliatory tariffs on iconic US goods such as jeans and Harley-Davidson motorbikes[21]. This led to the renegotiation of some of the tariffs in 2021[22]. The tariffs were eventually paused[23] under president Joe Biden’s administration.
Trade wars harm both sides and negotiations should be the first tool to use when disputes arise. Given how unpredictable Trump is on this matter, the UK’s response of not rushing into retaliation seems like a sensible approach. But at the same time, it should keep the threat of tariffs on the table for any future negotiations. With Trump, all countries should remember to expect the unexpected.
References
- ^ “liberation day” (edition.cnn.com)
- ^ 90-day pause (www.bbc.co.uk)
- ^ agricultural goods (edition.cnn.com)
- ^ hit back (www.theguardian.com)
- ^ Canada (www.bbc.co.uk)
- ^ consumer boycotts (theconversation.com)
- ^ steel (www.uksteel.org)
- ^ its economy (www.theguardian.com)
- ^ “Cool heads” (www.independent.co.uk)
- ^ Studies (papers.ssrn.com)
- ^ suffered significantly (www.nber.org)
- ^ Other evidence (drive.google.com)
- ^ sugar or soybeans (www.theguardian.com)
- ^ lobby groups (www.politico.com)
- ^ Studies (academic.oup.com)
- ^ found (www.cristianespinosa.com)
- ^ big US tech firms (www.washingtonpost.com)
- ^ EPA-EFE/SHAWN THEW (epaimages.com)
- ^ trade deal (ustr.gov)
- ^ felt the pain (www.imf.org)
- ^ jeans and Harley-Davidson motorbikes (www.theguardian.com)
- ^ 2021 (ec.europa.eu)
- ^ paused (www.bbc.co.uk)
