As a trade war escalates, businesses face higher production costs. They may lose sales domestically and abroad, especially when retaliatory tariffs reduce their exports in foreign markets. Companies may invest in automation or develop local supply chains to mitigate the impact. For example, semiconductor makers who rely on imported silicon and AI components may increase R&D spending to shift production to domestic facilities. They may also diversify suppliers to reduce dependence on foreign countries and avoid volatile global prices.
Tariffs and quotas limit imports, increasing domestic production and protecting national industries from foreign competition. They can also disrupt international supply chains and reshape global trade patterns. For example, the Smoot-Hawley tariffs in 1890 and the Section 232 steel and aluminum tariffs in 1930 protected American industries but aggravated the Great Depression and damaged world trade.
Besides tariffs, nations use other tools to protect their economic interests: quotas, subsidies to support domestic industries, and regulations to block foreign competition. These measures are less visible than tariffs but can have similar effects.
Although a trade war is damaging to all economies, it has distinct effects for different workers and industries. A disaggregated perspective, focusing on the experiences of specific worker groups, adds nuance to the debate over whether a trade war is good or bad for the economy. For instance, if the Trump administration raises tariff rates on autos from Europe or China to protect the US car manufacturing industry, these higher rates will make its own cars less competitive in those markets.