President Donald Trump’s proposal to impose steep tariffs on imported steel and aluminum have raised fears of an international trade war.
But foreign countries that are impacted may retaliate with their own tariffs on U.S. products. In other words, a trade war. Here’s what that means, how it could impact the U.S. economy, and whether you should be worried.
What is a trade war?
A trade war is when a country imposes tariffs or other barriers on imported products, prompting other countries to retaliate by implementing similar taxes or penalties.
Trump has actually already declared a “trade war” by calling for tariffs on steel and aluminum imports, says Manuel Perez-Rocha, an Associate Fellow of the Institute for Policy Studies. “What we can expect our trade partners to elicit legal challenges under WTO [World Trade Organization] rules and start retaliation against American exports,” he told Fortune.
When was the last time the U.S. had a trade war?
The last trade war was in the 1930s, and intensified the effects of the Great Depression, according to economists and trade experts. It started after President Herbert Hoover signed the Smoot Hawley Tariff Act into law in 1930, which raised tariffs on more than 20,000 products.
Trump advisers argue that the current administration’s tariffs, which are targeted only at steel and aluminum, are not the same as the protectionist Smoot Hawley provisions that raised tariffs on many products and all countries. But some experts say the current proposal could still kick off a full-blown trade war.
“If China and Mexico retaliate against the United States, that would be similar to Smoot-Hawley,” says Doug Irwin, an economics professor at Dartmouth and author of Peddling Protectionism: Smoot-Hawley and the Great Depression.
Why does Trump want a trade war?
Trump has a “maniacal focus” on trade deficits, according to Joshua Meltzer, a senior fellow at the Brookings Institute. This kind of tit-for-tat strategy loses the bigger picture of U.S. trade relationships.
“[A]n upheaval in trade would swamp all the potential gains from slashing regulations and taxes,” Fortune’s Shawn Tully wrote at the outset of Trump’s tenure. “Odds are that a full-on breakout of protectionism would cause the value of the dollar to spike, shrink-exports, and hobble growth.”
Douglas Holtz-Eakin, the president of the American Action Forum, a center-right advocacy group, and a former director of the Congressional Budget Office under George W. Bush, called a trade war “the big risk to [Trump’s] success.”
Perez-Rocha, the Institute for Policy Studies fellow, said: “A full blown trade war is dangerous for both sides. U.S. exporters can be badly damaged as well, from planes to canned products.”
Will there be a trade war with China?
“If all countries follow the example of the United States, this will undoubtedly result in a serious impact on the international trade order,” Chinese foreign ministry spokeswoman Hua Chunying said Thursday morning at a press conference.
And it’s not just the U.S. trade relationship with China that’s in jeopardy.
Perez-Rocha says, “The main US trade partners, including Canada, the European Union, Mexico, Japan, China and Brazil, have all said they are weighing countermeasures to the new steep tariffs.”
Avoiding a trade war would mean “dealing with perceived trade imbalances or distortions multilaterally, not unilaterally and abruptly like Mr. Trump has done,” he added. “Instead of trying to keep partners down, specially China, U.S. global leadership should be based on trying to align interests — precisely the contrary of Trump’s offensive mentality.”