Is Trump setting up a trade war? This is how the president's plan could pan out.


President Trump has been remarkably consistent in his disdain for free trade. Since his presidential campaign began, he has floated a wide variety of potential tariffs on imports to the United States. His transition team put forth the idea of a 10% tariff on all imports, and Trump has suggested tariffs as high as 45% on Chinese exports to the United States. Most recently, his consistent suggestions that America withdraw or renegotiate the North American Free Trade Agreement have scared producers of all sizes all over the globe.

If Trump enacts any of these specific policies, or any other seemingly (or actually) arbitrary tariff, he could provoke a trade war. Trade wars have happened before — most notably the so-called "Banana War" between the U.S. and EU. Trump Trade War I would be vastly more damaging than any trade war on record. 

How does a trade war happen? 

Here is a fictional, but realistic, example: A Chinese-made product costs $100. Trump imposes a 45% tariff. The product now costs up to $145 ("up to" because the producer could choose to absorb some of the cost). 

This tariff would harm Chinese producers, and China would not look kindly on this policy. China, the U.S. and 162 other countries are members of the World Trade Organization, which has a dispute settlement mechanism that can level the economic playing field. For example, after a long legal battle, Antigua and Barbuda was granted authorization to retaliate against the U.S. after the U.S. made internet gambling illegal in 2005

The WTO would almost certainly rule against the U.S. — as the tariff would have no legitimate reason to exist — and China would be permitted to cause an equivalent amount of harm to the American economy. For example, it could suspend copyright enforcement of U.S. intellectual property, or impose its own tariffs on U.S. agricultural exports to China.

Trump could then decide to retaliate and impose further tariffs... and the cycle continues. 

Eric Gay/AP

Will Trump's tariffs help or hurt Americans?

Trump's logic — if you can call it that — is that these tariffs would spur American production and create jobs... They won't.

Theoretically, the 45% tariff on Chinese goods would benefit domestic producers if they can profitably sell the identical good for below $145. It benefits consumers because they are employed by the producers.

It is true that some goods are functionally identical and that consumers will buy from whoever sells them the cheapest; but there are many goods, like cars or computers, that consumers choose for reasons beyond just price. Tariffs are not going to magically make American cars more attractive to consumers than those from Germany, Sweden, Japan or South Korea.

Factories in China will not move back to the United States. If they move at all, it would be to other places with cheap production, such as Vietnam or Malaysia. Of course, Trump could also institute tariffs on them, effectively widening the war. 

Thus the harm to Americans would be two-fold: The price of goods would increase due to the tariff, and then the retaliation would harm U.S. producers (and the employees who work for them). 

There is little the U.S. could do to prevent such retaliation short of threatening an armed conflict. And the idea of threatening to send troops to close allies like Mexico or Australia is totally insane... right?