The US-China trade war is shaping global supply chains and hurting household incomes. It may also undermine global economic growth. Fortunately, there are ways to avoid or mitigate the damage.
The most obvious consequence of a trade war is that it raises the price of imported goods (even if Trump insists they aren’t). Importers and consumers respond to higher prices by buying less, a reduction in demand known as “elasticity.” Depending on how much the tariffs rise, this could cut imports by up to 4 percentage points.
Countries with overall trade deficits, like the United States, spend more than they save, and so are prone to a drop in aggregate demand if they get hit by higher import prices. But that impact is not symmetrical: The cost of the imported items they buy is not as fungible or easily substitutable for money as are savings, so the impact is concentrated in specific industries, locations, and households. And it is worse for deficit nations if their trading partners retaliate, because then they have to spend even more to buy what they need.
To prevent this, the United States should negotiate bilateral concessions and rely on WTO dispute settlement, not unilaterally impose new tariffs. The US should also encourage firms to shift production from China to other countries in its supply chain, and it should not impose export bans or antitrust investigations on Chinese companies. It is a dangerous strategy to risk losing access to critical raw materials and components, and it would be even more reckless to provoke a military conflict with China before securing alternative supplies.