President Trump has launched a trade war that’s unlike any America has seen in decades. Against the advice of almost every professional economist, he has announced tariffs against most major economies. This shock could reshape global trade and supply chains, including your own company’s.
The President says he wants to use tariffs to reduce the gap between the value of goods the US buys from foreigners and those it sells to them – known as the trade deficit. He also says that it will encourage US consumers to buy more American-made products, increase tax collections and boost investment.
But economists say the opposite is more likely. Tariffs raise the price of imports, and higher prices reduce demand. In fact, the average household’s annual consumption drops by about 4% for each percentage point increase in the cost of their favorite imported brands. And the cost to companies of shipping those goods to consumers eats up profits and cuts corporate investment.
Business leaders are expressing serious concerns about the impact of the trade war on their prospects. A survey by the Business Roundtable found that CEOs have reduced their plans to hire and invest because of the tariff turbulence.
The economic consequences of a full-blown trade war are hard to predict. But the history of previous trade wars offers some clues. Most importantly, a successful diplomacy that achieves negotiated agreements will depend on carefully managing Trump’s mercurial nature. Otherwise, negotiating partners will be hesitant to make deals for fear that they could be undone by his next bombastic threat.