Skip to main content

What Will Be the Outcome of Trump's Trade War With China?

One analysis shows the White House's proposed tariffs will result in the loss of over 300,000 jobs.
The General Motors headquarters in Detroit, Michigan.

The General Motors headquarters in Detroit, Michigan.

At 12:01 a.m. on Friday, the Trump administration's tariffs on $34 billion worth of Chinese imports went into effect. China retaliated immediately, imposing equivalent 25 percent tariffs on over 500 types of American imports. China's tariffs primarily target agricultural goods and auto parts—the two industries that dominate the Midwestern states where President Donald Trump's trade policy has garnered so much support. The implications of this economic tit-for-tat could be huge: China's ministry of commerce already declared it "the biggest trade war of economic history so far."

To be sure, the markets have been rattled in recent weeks as fears of a full-scale trade war with China continued to grow. Alongside that anxiety has been a growing backlash from both corporate America and many Republican politicians against an economic showdown many predict will prove fruitless.

The effects of this round of tariffs are expected to be painful and immediate for certain industries. The United States exports approximately $14 billion worth of soybeans to China every year (about one-third of total production), and soybean prices have already fallen significantly in recent weeks amid escalating trade policy rhetoric. Several news outlets have quoted farmers who have canceled purchases of machinery and other investments due to the price drops. Similarly, a number of businesses that rely on imported steel (which was targeted in a previous round of U.S. tariffs) are already struggling with the after-effects.

And while the escalating conflict is not yet showing up in major economic indicators in a meaningful way—the June jobs report, released today, reflected strong hiring and increased labor force participation (although wage growth remains weak)—numerous economists have warned that the brewing trade war is beginning to affect corporate investment, and that future escalations will have meaningful effects on economic growth and employment. In the minutes for the Federal Reserve's June meeting, which were released yesterday, the Fed reported that businesses had "indicated that plans for capital spending had been scaled back or postponed as a result of uncertainty over trade policy." Last week, General Motors, the U.S. automaker, warned that tariffs could lead to "less investment, fewer jobs and lower wages" for its workers.

The full effects of a trade war are difficult to predict and depend heavily on the specifics of the initial and retaliatory tariffs imposed. But according to modeling from the Tax Foundation, a non-partisan research group, the tariffs already enacted by the Trump administration will reduce long-run gross domestic product (GDP) by 0.6 percent (approximately $15 billion), wages by 0.04 percent, and result in the elimination of over 48,000 full-time jobs.

If the Trump administration escalates the trade war (as it has threatened to do) and China and other countries retaliate (as they have threatened to do), the effects will grow. According to the Tax Foundation's modeling, if the Trump administration enacts all currently threatened tariffs on automobiles and parts and Chinese imports, and if trading partners follow through with the retaliatory tariffs they have announced so far, then "U.S. GDP would fall by 0.47 percent ($117.6 billion) in the long run, effectively offsetting one-quarter of the long-run impact of the Tax Cuts and Jobs Act. Wages would fall by 0.33 percent and employment would fall by 364,593."

If the escalation continues, the numbers get worse. In an analysis published back in March, Penn Wharton Budget Model researchers estimated that an "all-out trade war" would reduce U.S. GDP by 0.9 percent and wages by 1.1 percent by 2027.