By Lauren Foster
President Donald Trump has fired the opening salvo in a global trade war.
Earlier this week, the administration rolled out the steepest tariffs in a century, marking a significant change in U.S. trade policy and sowing panic across global markets.
Universal tariffs go into effect Saturday at 12:01 a.m., while reciprocal tariffs will start on 9 April on new imports of foreign-made goods.
Trump argues that imposing tariffs will pressure other nations to reduce trade barriers on American goods and services, helping to level the economic playing field for U.S. exports. He also says tariffs will encourage companies to produce items such as automobiles domestically to avoid the additional costs.
Many economists worry tariffs will lead to higher prices for American consumers, as businesses are likely to pass the added expenses down the supply chain.
To better understand what is happening and how an escalating trade war could affect Americans’ pocketbooks, the Darden Report spoke with trade expert Peter Debaere, the Tipton Snavely Professor of Business Administration at the University of Virginia’s Darden School of Business. Debaere is an international economist, with a focus on international trade, multinationals and trade policy.
Darden professor Peter Debaere Debaere is an international economist, with a focus on international trade, multinationals and trade policy.
Q: How will a global trade war affect the average American consumer in terms of prices and the availability of products?
Under the first Trump administration we had the first trade war with China. In tit-for-tat fashion, bilateral tariffs were ratcheting up — reaching on average 20% for about 60% of China-U.S. trade. Now, we potentially face a much wider conflict with all trading partners. We are imposing an across-the-board minimum additional tariff of 10% for some countries, and a much higher additional tariff for others — 20% for the European Union, and 34% for China. These “reciprocal” tariffs are much higher than what U.S. exports face abroad. (Advanced economies on average impose tariffs around 5% or less; those of emerging economies are slightly higher.)
In other words, all imported goods are subject to tariffs this time around. China is ready to retaliate with a 34% tariff on U.S. goods. We will see who follows. If all tariffs are implemented, I don’t expect an immediate price hike across the board. A lot of trade is in intermediate products used in production (not final products). In some instances, inventories exist, and sellers may temporarily cut their margins. With perishables, such as food, that directly go to consumers and where branding does not play much of a role, I expect quicker price increases. Let’s also not forget that the United States is a relatively large country, and imports don’t constitute a very high fraction of GDP (around 15%).
Q: Which industries and products are most vulnerable to the newly implemented tariffs? How might this affect employment within these sectors?
Manufacturing and agriculture dominate international trade and are hence most vulnerable. The service sector (more than 70% of our economy) is less exposed. Of course, when the service sector (e.g. healthcare) uses imported goods, tariffs matter. At this point, there is a lot of uncertainty. Are these tariffs going to persist? Are they just a bargaining chip? It is difficult to predict the precise impact on prices and employment. However, uncertain consumers and investors hold back, which slows down GDP and employment growth.
Q: What are the broader implications of this trade war on the U.S. and global economies?
Since World War II, we have had an international trading regime governed by rules. It is by no means perfect, but it has worked. If one wanted to address some of its flaws, and challenge China on how it treats intellectual property rights, subsidies, etc., one needed allies. The U.S. is a large country and has a lot of clout, but in the multilateral world that we live in, it is too small to push for reform on its own. It looks like we either think we can go it alone, or that we are not interested in reform.
“Tariffs, and how they are implemented, could erode the traditionally strong U.S. institutions, and lead to institutional corruption, which would be detrimental to long-term prosperity. “
Peter Debaere
Unilateral tariff hikes can create a pernicious type of uncertainty that erodes trust. Companies make investment and spending decisions based on prevailing tariffs, and rules — tariffs, in a way, are like a contract. To the extent that people and companies in the United States and abroad start interpreting the behavior of the Trump administration as a sign that it does not worry about contracts and prior commitments, and is willing to changes rules whenever it sees fit, these tariffs could have far-reaching consequences. Maybe the best lobbyists will get reduced tariffs, or maybe those most closely aligned with Republican states, or those who can deliver personal favors to President Trump and his inner circle. Tariffs, and how they are implemented, could erode the traditionally strong U.S. institutions, and lead to institutional corruption, which would be detrimental to long-term prosperity. Institutional credibility is quickly lost, but hard to earn.
Q: What can we learn from history?
Change is difficult, and it is often easiest to blame others or outsiders. There is no question that manufacturing’s relative share of the economy has been decreasing for quite some time, and that more international trade (with China) has had negative impacts on blue-collar workers. There are, however, many reasons for why working people have not been doing all that well (and why our society is so unequal), and not all of those are due to globalization. There is automation and technological change. There is unequal access to education or a safety net. There is the unwillingness to redistribute some of the gains from trade, the loss of unions’ bargaining power, and there is tax dodging by, for example, multinationals and well-off individuals. I fear that higher tariffs by themselves will not solve these deeper challenges and magically bring back manufacturing jobs.
International cooperation is difficult. The most effective way for countries to counter the United States would be for them to work together as a bloc. This will not happen easily because of the variation in tariffs across countries. UK Prime Minister Keir Starmer, rather than join the EU, seems happy he only got an additional 10% tariff, instead of the EU’s 20%. Every individual player thinks he/she can carve out a deal.
Q: What’s the worst-case scenario? The most optimistic?
When I see how the tariffs are rolled out, and the rationales that are offered, I worry about the competence of the administration. Economists typically don’t think tariffs are very effective to decrease a country’s overall trade deficit (excess of imports over exports). Yes, tariffs will decrease imports, but the higher prices they bring about will undercut our exports’ competitiveness, and so will foreign tariff retaliation. Additionally, a trade deficit implies we need financing from abroad, because revenue from exports is not sufficient to pay for imports. If the aim is, as the administration claims, to attract massive amounts of foreign direct investment (funding from abroad) to build up manufacturing, then as a matter of accounting, this inflow of capital is likely to require a trade deficit in a low-savings rate country such as the United States: (net) funding from abroad roughly equals the trade imbalance.
My worst-case scenario? U.S. government debt is over 100% of GDP and thus relatively high, and the Trump administration promises a large tax cut that may bring about a large budget deficit. The tariff story is one instance (DOGE action is another) where people may start questioning the competence of the administration. Maybe the administration really does not know what it is doing. I am reminded of the quick end of the previous UK prime minister (Liz Truss), where suddenly investors and the public realized that the policies she advocated were detached from economics and the economic reality. Truss and her ministers believed their own fantasies, and people lost confidence. In a highly indebted country such as ours, loss of confidence could be expensive.
The best-case scenario? It is hard for me to see an upside. Maybe the tariffs were just a gimmick to get a “grand bargain.” All countries come to the bargaining table and work together to fix the international trading system’s flaws, and the U.S. gets the desired market access abroad, and improved intellectual property protection where justified. And we all live happily ever after.
