The Economic Consequences of Trump's Trade War
- Prof Emanuele Bracco
- Mar 24
- 5 min read
Updated: Mar 25
1. The Economics and Politics of Tariffs
President Trump's administration embarked on a significant trade war against China, but also against neighbours and allies such as Canada, Mexico and (soon enough) the European Union. His stated aim is to affirm the primacy of the US in the world stage and protect American workers and businesses.
From the geopolitical point of view it is very difficult to predict the medium and long term effect of these policies: are they going to make the US more powerful and respected or are they going to alienate historical allies, throwing them in the arms of China?
From the economic point of view, the underlying belief driving this strategy was that the costs of the tariffs would primarily fall on targeted countries—principally China—and help to balance the US trade deficit. Public opinion polls revealed a surprisingly high percentage of Republican voters who shared this assessment. This belief underpins Trump’s fundamental strategy: to use tariffs as leverage to renegotiate more favorable trade deals. The reality, however, is far more intricate and the consequences far less predictable than this simple notion suggests.
Economic theory surrounding tariffs is fairly simple. In essence, tariffs are taxes on imported goods, leading directly to higher prices for consumers. The added complication is that nowadays final goods are often manufactured through a long process involving many companies in many countries: almost half of US imports are intermediate goods, i.e. goods that are brought into the US to be combined with other products before being sold to final consumer. The longer (and more international) is the supply chain, the wider will be the impact of import tariffs on prices: a good whose intermediate components passed the US-Canada border twice would compounds in its price the double passage through custom.
Tariffs generate also revenue for the government, but the amount of revenue is somehow difficult to predict: if the imported product is difficult to substitute, revenues will be high, but so will the impact on domestic prices. If instead the imported product is substituted by a locally produced one, tariff revenues may be much smaller, and the impact on prices not as substantial. Further complicating matters is the likelihood that foreign exporters may shift sales to other markets, thus reducing the competitiveness and economic growth of the country imposing tariffs. The extent to which these effects manifest depends heavily on factors such as the size of the tariff-imposing country (influencing trade diversion), the structure of the economy, and the nature of the affected goods. The actual effect of Trump’s tariff war is ultimately an empirical question.
2. Empirical Evidence from Trump's First Term
It is way to early know the effect of these tariff hikes on any relevant variable, but we do have a substantial amount of evidence on the effect of the earlier round of tariffs implemented by Donald Trump in his first term.
Autor et al. (2024) provide a meticulous examination of the US-China trade war during 2018-19, leveraging on geographically detailed data; in Figure 1 we can see a map that highlights the different level of exposure of each commuting zone to the tariff hikes. Their findings reveal a crucial and largely unexpected result: the US tariffs had no discernible positive effect on employment within the directly affected sectors of the US economy. As reported in Fetzer and Schwarz (2021), China retaliatory tariffs were thought to target specific areas and sector, and can be found that they negatively impacted US employment, particularly within the agricultural sector. Although farm subsidies did partially offset some of these negative effects for specific regions and producers, the overall net impact on the US economy remained negative. Figure 2 plots exactly this: the geographical dispersion of China’s retaliatory tariffs. This study also offers compelling insights into the political ramifications of these economic policies. The analysis shows a link between regions more heavily exposed to the import tariffs and increased Republican affiliation and voting for Trump in the 2020 election, even though these regions suffered demonstrably negative economic consequences as a direct result of the tariffs. The potential political backlash of tariffs will become salient as Congress prepares for mid-term elections in 2026.
A further element to be highlighted are the distributional effects of tariffs. Clausing and Lovely (2024), in their detailed analysis of tariff impacts, underscore the economic mechanics involved in economies dominated by long supply chains. According to their calculations import tariffs are likely to be highly regressive, as poorer households have a higher propensity to consume and disproportionally consumed the cheap imports that may be curbed by tariffs.
3. The Case of Vietnam: An Unintended Beneficiary
The consequences of Trump's trade war were far-reaching and significantly affected countries beyond the immediate participants—the US and China. Vietnam, in particular, experienced a notable positive effect. Kaht et al. (2024) provide evidence demonstrating increased foreign direct investment (FDI) in Vietnam, particularly in regions bordering China. This FDI surge directly relates to businesses seeking to circumvent the tariffs imposed on Chinese goods. The study clearly links the “tariff wedge”—the difference in prices due to tariffs—to a considerable increase in Vietnamese industrial output, reaching as much as a 4.6% rise in industrial production in some areas. This unintended consequence of the trade war highlights not only Vietnam’s economic adaptability but also the unpredictable ripple effects of protectionist measures within a globally interconnected economic system, not to mention its potential political ramifications. Another significant benefit in this specific case was to the environment. Vietnam benefitted from the environmental gains in terms of air pollution and carbon footprint, as its energy production relies more heavily on clean energy production than China.
4. The High Cost of Protectionism and the Limits of Simple Solutions
President Trump's trade war, founded on the seemingly straightforward premise that the economic costs would primarily be borne by other nations, is likely to impact negatively on US prices with little or no positive effect on US manufacturing jobs.
Empirical evidence from tariff hikes in 2018-19 refutes the simplistic expectation that tariffs would contribute to incentivize the domestic manufacturing sectors. The costs extend beyond the direct impact on employment and prices. The inherent intricacy of global supply chains and makes it impossible to have accurate predictions, and this is exacerbated by the uncertainty on retaliatory policies. The Trump administration's trade war serves as a stark reminder of the inherent risks involved in protectionist strategies and underscores the necessity of carefully weighing all the economic and political implications before embarking on such measures.
References for Further Reading
Autor, D., Beck, A., Dorn, D. and Hanson, G.H., 2024. Help for the Heartland? The Employment and Electoral Effects of the Trump Tariffs in the United States (No. w32082). National Bureau of Economic Research.
Fetzer, T. and Schwarz, C., 2021. Tariffs and politics: Evidence from Trump’s trade wars. The Economic Journal, 131(636), pp.1717-1741.
Kahn, M.E., Liao, W.C. and Zheng, S., 2024. How the US-China Trade War Accelerated Urban Economic Growth and Environmental Progress in Northern Vietnam (No. w33126). National Bureau of Economic Research.
Clausing, K.A. and Lovely, M.E., 2024. Why Trump's tariff proposals would harm working Americans. Peterson Institute for International Economics Policy Brief, pp.24-1