Have you noticed prices going up on everyday items lately?
Or heard news about tensions between countries over trade? You might be experiencing the effects of what economists call a “trade war.”
These international conflicts are growing more common, affecting everything from the prices we pay in stores to the availability of jobs in our communities.
What is a trade war?
A trade war happens when countries get into an economic fight with each other. It usually starts when one country thinks another country isn’t playing fair in trade.
The first country might put extra taxes (called tariffs) on products coming from the second country. Then, the second country gets upset and does the same thing back…a retaliatory tariff. It’s like a playground argument, but with billions of dollars and millions of jobs at stake!
Imagine you and your neighbor both sell lemonade.
You sell lemonade in your neighborhood, and someone else sells lemonade in a different neighborhood. Both of you also sell lemonade in each other’s neighborhoods.
One day, you notice your competitor’s lemonade is cheaper and becoming very popular even in your own neighborhood. You suspect your competitor might be getting cheaper ingredients or receiving extra help from their neighborhood, allowing them to keep prices low.
Feeling disadvantaged, you persuade your neighborhood to place an extra fee on your competitor’s lemonade sold in your area, making their lemonade more expensive and less attractive to your customers.
In retaliation, your competitor’s neighborhood imposes a similar fee on your lemonade whenever you sell in their area.
This back-and-forth escalates, with both neighborhoods continuously increasing fees on each other’s lemonade. Eventually, both you and your competitor experience a significant drop in sales.
Customers in both neighborhoods now have fewer choices and pay higher prices, and both sellers earn less profit.
This scenario illustrates how trade wars start: initial protective actions lead to retaliation, ultimately harming all involved and raising costs for everyone.
That’s basically how a trade war works, but on a global scale.
To provide a complete definition, a trade war is a conflict where countries restrict each other’s trade through punitive measures.
Key “weapons” include:
- Tariffs: Taxes on imports, raising costs for foreign goods.
- Non-tariff barriers: Regulations, subsidies, or quotas limiting imports.
- Export restrictions: Blocking domestic companies from selling critical goods abroad.
These measures often spiral as each nation retaliates, leading to a cycle of protectionism.
Why do countries start trade wars?
Countries start trade wars for several reasons:
To protect their own industries: A country might want to shield its own companies and workers from foreign competition. For example, if a lot of cheap steel is coming in from another country, the local steel industry might struggle to compete. The government might add tariffs to make the foreign steel more expensive, hoping to help local steel companies and save jobs.
To fight back against what they see as unfair practices: Sometimes a country believes another nation is cheating in trade by subsidizing their companies, stealing technology, “dumping” products below cost, or manipulating their currency. A country facing such practices might use tariffs as a way to say, “Stop doing that!” and force changes.
For political reasons: Leaders sometimes use trade wars to look strong to voters who are worried about losing jobs to other countries. Politically, leaders may take a hard line on trade to appeal to nationalism or appear tough to voters. It can be a way of saying, “I’m standing up for our country and our workers!”
For broader strategic goals: Strategically, tariffs can be a way to gain leverage in negotiations or to pressure another government on non-trade issues. For example, tariffs or sanctions might be imposed to influence a rival nation’s policies or as a form of economic punishment.
To reduce trade deficits: Countries sometimes resort to trade wars to tackle large trade deficits. For example, if Country A consistently imports much more from Country B than it exports, leaders in Country A may feel a trade war (with tariffs to curb imports) will improve the trade balance.
For national security: Countries might restrict trade in certain products like advanced technology or weapons-related materials to protect their national security interests and maintain military superiority.
In summary, trade wars happen when countries believe they have something to gain (or nothing to lose) by fighting over trade – whether it’s safeguarding jobs at home, correcting perceived injustices, or asserting power on the world stage.
What are the possible benefits of trade wars?
Trade wars are controversial because they have both potential benefits and significant drawbacks.
Supporters of trade wars point to several potential benefits:
Protection for local industries and jobs: When tariffs make foreign products more expensive, consumers might buy more locally-made products instead. This could support jobs in those industries. For example, if foreign-made cars become more expensive due to tariffs, people might buy more cars made in their own country, potentially supporting local auto workers.
Increased government revenue: When imported goods are taxed at higher rates, the government collects more money. This additional revenue could be used for public services or to reduce other taxes.
Encouraging domestic manufacturing: Companies might decide to build factories in your country instead of abroad if tariffs make importing expensive. This process, sometimes called “reshoring,” could create new manufacturing jobs.
Negotiating leverage: Sometimes the threat of tariffs can bring other countries to the negotiating table. A country might use tariffs as a bargaining chip to gain concessions on other issues, like intellectual property protection or market access.
What are the downsides of trade wars?
While trade wars might sound good in theory, they often come with significant costs:
Higher prices for consumers: This is the most obvious and immediate effect. When tariffs are added to imported goods, companies usually pass those costs on to consumers. According to one analysis, recent tariffs cost the average American household about $1,072 per year in higher prices. That’s money coming directly out of people’s pockets!
Economic slowdown: Trade wars can slow down economic growth by disrupting established business relationships and supply chains. When companies face uncertainty about future trade conditions, they often delay investments and hiring decisions.
Job losses in export industries: While tariffs might protect jobs in industries competing with imports, they often lead to job losses in export industries targeted by retaliatory tariffs. For example, when China placed tariffs on American agricultural products, U.S. farmers lost significant export opportunities.
Increased inflation: By raising prices across many products, tariffs can contribute to overall inflation in the economy. This can lead central banks to raise interest rates, making loans more expensive for everyone.
Damaged international relationships: Trade wars create tension between countries that can spill over into other areas of international cooperation, like climate change or security issues.
In summary, the “pros” of trade wars are typically concentrated benefits for specific industries or strategic interests, whereas the “cons” are broader costs borne by consumers, related industries, and overall economic growth.
How do trade wars affect currency markets?
Trade wars don’t just affect the prices of goods, they also ripple into currency markets and exchange rates.
When two large economies clash with tariffs and trade barriers, their currencies often react in value. Here are a few key ways trade wars impact currencies and the foreign exchange (FX) market:
Shifts in Currency Demand via Trade Flows
Tariffs alter import and export flows, which in turn change demand for currencies. If Country A buys fewer goods from Country B due to tariffs, it needs less of Country B’s currency (since imports are usually purchased in the exporter’s currency).
Reduced demand can cause Country B’s currency to depreciate. For example, when the U.S. imposed tariffs on Chinese products, American importers needed fewer Chinese yuan to pay for imports, putting downward pressure on the yuan’s value.
Conversely, cutting imports can sometimes strengthen the imposing country’s currency slightly (less outflow to buy foreign goods can improve its trade balance, boosting its currency).
Safe Havens vs Risk Currencies (Market Sentiment)
Trade war headlines often spur volatility in financial markets, which affects currencies. In times of escalating trade tensions, investors tend to seek “safe haven” assets.
Currencies like the Japanese yen and Swiss franc (and sometimes the U.S. dollar) often strengthen during global turmoil, because investors view them as stable stores of value. On the other hand, currencies of countries that are very trade-dependent or seen as risky tend to weaken.
For example, during U.S.-China trade war flare-ups, the Chinese yuan weakened and so did currencies of export-oriented economies (like South Korea’s won or Australia’s dollar), while the yen and U.S. dollar often firmed up amid the uncertainty.
In short, a trade war can spark risk-off sentiment in FX markets: traders buy safe-haven currencies and sell those linked to global trade and growth.
Policy Responses and “Currency Wars”
Sometimes, a country engaged in a trade war might actively influence its currency. A weaker currency can offset tariffs by making that country’s exports cheaper globally.
There have been instances where central banks or governments are suspected of letting their currency depreciate as a weapon in a trade dispute.
A notable example occurred in 2019 during the U.S.-China trade war: after new U.S. tariffs, China’s central bank allowed the yuan to fall below the symbolic rate of 7 yuan per dollar (the weakest level in a decade).
This prompted U.S. officials to label China a “currency manipulator,” as it appeared to counteract tariff impacts by boosting Chinese export competitiveness. Such moves blur the line between a trade war and a currency war.
Moreover, trade war-induced economic slowdowns may lead central banks to cut interest rates (to stimulate the economy), which can also weaken a currency.
Market Volatility and Currency Stability
Overall, trade wars introduce uncertainty that can make currency markets more volatile.
Rapidly shifting trade policies and the threat of further escalation cause swings in exchange rates as traders try to price in future impacts. Businesses find it harder to plan, and currency stability can be undermined in affected countries.
In extreme cases, broad trade sanctions or embargoes can crash a currency’s value by isolating a country from global commerce.
For example, when Russia faced sweeping trade and financial sanctions in 2022, the Russian ruble initially plummeted about 30% against the dollar before stabilizing. Such sharp currency falls reflect both the direct impact of lost trade/export revenue and a panic flight of capital.
Forex traders during a trade war must navigate a climate of heightened uncertainty, rapid news-driven movements, and government interventions – making risk management more crucial than ever.
How do trade wars affect everyday people?
Trade wars might sound like distant economic battles between countries, but they have very real effects on ordinary people’s lives:
Higher prices at the store: This is the most direct impact. When tariffs are added to products from other countries, those products become more expensive. This affects everything from smartphones and laptops to food and clothing.
Changes in job opportunities: Some industries might add jobs due to protection from foreign competition, while others might cut jobs due to retaliatory tariffs or higher costs for imported materials. The net effect is usually negative, with more jobs lost than gained overall.
Smaller retirement accounts: Trade wars often cause stock market volatility, which can reduce the value of retirement investments like 401(k)s and IRAs.
Higher interest rates: If trade wars contribute to inflation, central banks might raise interest rates in response. This makes mortgages, car loans, and credit card debt more expensive.
Reduced buying power: The combination of higher prices and potential wage impacts means many households have less purchasing power during trade wars.
The impacts aren’t evenly distributed, either. Some communities might be hit harder than others, depending on their local industries. For example, agricultural areas often suffer when other countries place retaliatory tariffs on farm products.
What are some recent examples of trade wars?
The 2025 Trump Tariffs
In early 2025, the Trump administration implemented significant new tariffs on major U.S. trading partners:
- A 20% tariff on all imports from China (up from 10% previously)
- 25% tariffs on all imports from Mexico and Canada (but these tariffs were temporarily paused for certain goods under the USMCA agreement)
- 10% tariffs on Canadian energy resources
China responded with its own tariffs on American coal, natural gas, oil, agricultural machinery, and large vehicles – products chosen strategically to impact politically important regions in the U.S.
These broad tariffs affected a wide range of consumer goods and industrial materials. Economists estimate total GDP losses of up to 0.2% and job losses exceeding 223,000 when considering all tariffs combined.
The 2018-2019 U.S.-China Trade War
This earlier trade conflict began when the U.S. investigated China’s practices related to intellectual property and technology transfer. The U.S. ultimately placed tariffs on about $360 billion worth of Chinese products.
China retaliated with tariffs on U.S. agricultural products, energy exports, and manufactured goods. The conflict expanded beyond tariffs to include investment restrictions and export controls.
Economic analyses showed this trade war reduced U.S. GDP by approximately 0.2% and eliminated about 142,000 jobs. Agricultural producers were particularly hard hit by Chinese retaliatory tariffs, requiring government support programs to offset lost export opportunities.
The conflict was partially resolved through a “Phase One” trade agreement in January 2020, though many tariffs remained in place.
Other Notable Trade Disputes
Other significant trade conflicts in recent years include:
- The 2018 U.S. tariffs on steel and aluminum (citing national security concerns), which affected many trading partners and triggered retaliatory measures from the EU, Canada, Mexico, and others.
- A 2019 dispute between Japan and South Korea over export restrictions on chemicals needed for semiconductor manufacturing.
What does the future hold for international trade?
The recent surge in trade conflicts signals a potential shift away from the decades-long trend toward more open global trade. This reflects deeper changes in the world order, including:
- Shifting power balances between established economies like the U.S. and rising powers like China.
- Growing domestic political pressure from communities that feel harmed by globalization.
- Increasing concerns about economic security and supply chain resilience, especially after disruptions like the COVID-19 pandemic.
- The blending of economic and national security objectives in trade policy.
Trade wars aren’t just economic policies – they’re also political instruments and expressions of national values. Their impacts spread throughout the economy, affecting currency markets, supply chains, consumer budgets, and job opportunities.
While temporary protective measures might address specific short-term concerns, the health of the global economy ultimately depends on finding better ways to resolve trade disagreements without triggering destructive cycles of retaliation.
Most economists agree that in the long run, expanded trade tends to increase overall prosperity, though the benefits aren’t always shared equally. The challenge for policymakers is finding ways to maintain the advantages of open trade while addressing legitimate concerns about fairness, job displacement, and national security.