What Is a Trade War? History, Effects, and the U.S.-China Example

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A trade war is an economic conflict in which two or more countries raise tariffs or impose other trade restrictions on each other’s goods and services, with each new barrier answering a previous one. A single tariff is a trade policy. It becomes a trade war when the targeted country retaliates and the measures escalate round by round. The usual triggers are claims of unfair trade practices, efforts to shield domestic industries, or attempts to shrink a trade deficit.

Key takeaways

• A trade war is defined by retaliation: each new barrier answers a previous one, and the cycle can repeat.
• Tariffs are the main weapon, alongside quotas, product standards, subsidies, export controls and currency moves.
• The importer pays the tariff at the border, but the cost can pass to consumers, domestic manufacturers that buy inputs, or foreign exporters that cut prices.
• Major cases include the Smoot-Hawley Tariff of 1930 and the U.S.-China dispute that began in 2018.

What Is a Trade War?

A trade war is a form of protectionism that has turned reciprocal. Protectionism covers any government policy that restricts international trade to favor domestic producers, such as taxing imported steel to help local mills or capping imports of a farm product to support local growers. A country can be protectionist without a trade war. The two governments are in a trade war once the targeted country answers with its own barriers.

Three features separate a trade war from ordinary trade policy:

1. A targeted measure. The first restriction is aimed at a specific country or group of countries, or it lands heavily on them.
2. Retaliation. The affected country responds with restrictions of its own, often aimed at politically sensitive exports such as farm goods or well-known brands.
3. Escalation. Each side raises rates, widens the list of covered products, or adds new tools until a negotiated deal, a ceasefire or exhaustion ends the cycle.

Domestic politics often drives the first step. Trade unions, industry groups and lobbyists in sectors facing import competition press lawmakers to make foreign goods more expensive.

How a Trade War Works

The tariff mechanism

A tariff is a tax or duty on imported goods. Most tariffs are ad valorem, meaning a percentage of the goods’ customs value. The basic calculation is:

Duty owed = customs value × tariff rate

Landed cost = customs value + duty (+ shipping and other fees)

The duty is paid to the importing country’s customs authority by the importer of record, usually a domestic company. The exporting country does not pay it directly. Who ends up bearing the cost depends on how prices adjust afterward.

Hypothetical example (illustration only): A U.S. retailer imports a small appliance with a customs value of $100. The government imposes a 25% tariff on that product from Country X.

• Duty owed: $100 × 25% = $25. The retailer’s landed cost rises from $100 to $125, ignoring freight.
• If the retailer passes the full increase through, the shelf price rises by at least $25, and consumers bear the tariff.
• If the foreign maker cuts its price to $90 to keep the order, the duty becomes $90 × 25% = $22.50 and the landed cost is $112.50. The cost is now shared: the exporter absorbs $10 of lost revenue and the importer still pays $22.50 more than the original $100 total.
• If the retailer keeps the shelf price unchanged, it absorbs the duty through a lower profit margin.

The tariff can also raise prices on domestic substitutes. If imported appliances cost more, domestic makers face less price competition and may raise their own prices, even though no tariff applies to their goods.

Retaliation and escalation

Now suppose Country X responds with a 25% tariff on a U.S. farm export. American farmers become less competitive in that market, and buyers there may switch to suppliers in other countries. If the U.S. then widens its tariff list, Country X may widen its own. This is how a dispute that starts in one sector, such as steel or electronics, spreads into agriculture, consumer goods and services.

Spillover does not stop at the two main parties. Global supply chains mean a component may cross several borders before final assembly, so a tariff between two countries can raise costs for manufacturers in a third country. Trade can also be rerouted as importers look for suppliers in countries not covered by the tariffs.

Tools beyond tariffs

Tariffs get the most attention, but trade wars often include non-tariff measures:

• Import quotas, which cap the quantity of a good that can enter.
• Product standards and licensing rules, which can be written or enforced in ways that make foreign goods harder to sell.
• Subsidies to domestic producers, which lower their costs relative to foreign rivals or discourage outsourcing.
• Export controls, which restrict sales of strategic products such as advanced technology.
• Purchase halts, in which governments or state-owned firms stop buying certain foreign goods.
• Currency moves, where a weaker home currency makes exports cheaper abroad and partly offsets foreign tariffs.

Trade War vs. Related Terms

Sanctions. Sanctions are economic or political penalties meant to change a country’s behavior, often over security, human rights or foreign policy, and they may freeze assets or block financial transactions as well as trade. A trade war’s goals are about trade itself: market access, deficits, subsidies, intellectual property. Sanctions are also frequently one-directional, while a trade war involves retaliation by definition.

Trade dispute. A trade dispute is a disagreement over trade rules, often handled through formal channels such as the World Trade Organization’s dispute settlement process. A dispute can stay legal and procedural. It becomes a trade war when governments skip or move past those channels and trade barriers directly.

Trade spat or trade friction. These are informal labels for smaller, contained disputes, such as a tariff exchange over a single product, that have not escalated across sectors.

Currency war. A currency war is competitive devaluation, where countries push down their exchange rates to gain export advantages. It can accompany a trade war, as concerns in 2019 showed, but it works through exchange rates rather than border taxes.

Decoupling and de-risking. These terms describe longer-term strategies to reduce dependence on a rival’s supply chains. Decoupling implies cutting economic ties deeply; de-risking implies reducing exposure in sensitive sectors while keeping most trade. Both can grow out of a trade war or be pursued without one.

Mercantilism. Mercantilism is an older economic doctrine holding that national wealth comes from running trade surpluses. Many trade war arguments about deficits echo mercantilist thinking, but mercantilism is a theory, not a conflict.

History of Trade Wars

Trade wars are as old as international trade. In the 17th century, European colonial powers fought over the exclusive right to trade with their overseas colonies, using monopolies and navigation rules to keep rivals out.

Britain and China: the Opium Wars

The 19th-century Opium Wars show a trade conflict turning into a military one. After the Chinese emperor banned the opium British merchants had been shipping in from India, Chinese authorities moved to seize the drug. Britain’s navy prevailed, and China was forced to open to foreign trade on terms set largely by the victors.

The United States and Smoot-Hawley

In 1930, the United States passed the Smoot-Hawley Tariff Act to protect American farmers from European agricultural imports, pushing already high import duties to nearly 40%. Many trading partners retaliated, and world trade fell sharply as the Great Depression deepened, which is why Smoot-Hawley is widely cited as protectionism worsening a downturn. The Reciprocal Trade Agreements Act of 1934, passed under President Franklin Roosevelt, let the president negotiate tariff reductions and began the U.S. shift toward negotiated trade liberalization.

The U.S.-China Trade War

The U.S.-China trade war is the most prominent modern example, showing the full cycle of threat, retaliation, truce and renewed escalation.

Background

During the 2016 presidential campaign, Donald Trump criticized existing trade agreements and promised to bring back manufacturing jobs that had moved to countries such as China and India. In office, his administration also threatened to withdraw the U.S. from the World Trade Organization.

2018: Tariffs begin

Starting in January 2018, the U.S. imposed tariffs on a widening range of products, including solar panels, washing machines, steel and aluminum. Several of these measures hit allies as well as China. Canada answered with temporary duties on American steel and other goods, and the European Union put tariffs on U.S. farm products and other items, including Harley-Davidson motorcycles.

Against China specifically, the administration threatened a large penalty over alleged intellectual property theft along with major tariffs. China responded with a 25% tariff on more than 100 U.S. products. Through the rest of 2018, both governments published lists of proposed tariffs on each other’s goods. The U.S. duties weighed on Chinese manufacturers and contributed to a slowdown in China’s economy. In December, the two sides agreed to pause new tariffs.

2019: Talks collapse and escalate

The ceasefire held into 2019, and by spring a deal appeared close. In early May, Chinese negotiators hardened their position, declining to change laws that subsidized Chinese companies and insisting that existing tariffs be removed. On May 5, 2019, the president announced that tariffs on $200 billion of Chinese imports would rise from 10% to 25% as of May 10. The U.S. trade deficit with China had recently fallen to its lowest level since 2014.

China retaliated by halting imports of farm products by state-owned firms. Its central bank also let the yuan weaken past 7 per U.S. dollar for the first time in more than a decade, which raised fears that the trade war could turn into a currency war.

2020: The Phase One deal

On January 15, 2020, the U.S. and China signed a trade agreement, widely known as the Phase One deal. It eased the escalation, but many tariffs from earlier rounds stayed in place.

2024: New targeted tariffs

Trade barriers kept rising under the next administration. In 2024, President Biden raised the tariff on Chinese electric vehicles to 100%, lifted tariffs on solar cells and semiconductors to 50%, and increased the tariff on lithium-ion batteries to 25%. Other technology products also faced higher duties, and China pledged to retaliate. These measures focused on strategic industries rather than broad consumer goods.

2025 onward

After President Trump returned to office in 2025, the U.S. added tariffs on Chinese imports and China responded with countermeasures. Later talks, including a meeting in Geneva, produced temporary tariff reductions, but many barriers remained and the dispute has continued.

Economic Effects of a Trade War

Who pays

An International Monetary Fund study of the 2018 to 2019 tariffs found that U.S. importers bore most of the cost of tariffs on Chinese goods, and those costs largely reached American consumers as higher prices. That ran against the stated aim of making China pay.

Prices and inflation

Higher import costs raise prices on finished goods and on inputs. Manufacturers that rely on imported parts or raw materials see margins shrink and may raise their own prices, so manufactured goods tend to be most affected. Broad tariffs can feed into overall price measures such as the Consumer Price Index. When no domestic substitute exists, consumers may face shortages rather than just higher prices.

Growth, jobs and exports

Tariffs create winners and losers. Protected domestic industries can gain sales and jobs, and the government collects tariff revenue. Industries that buy the taxed goods lose, and exporters hit by retaliation lose foreign customers. Retaliatory tariffs make U.S. exports more expensive abroad; estimates of their direct effect on U.S. GDP during the 2018 to 2019 round were small, but the impact was concentrated in targeted sectors such as agriculture.

Specialization and opportunity cost

Mainstream trade theory holds that countries gain by specializing in what they produce relatively efficiently and trading for the rest. Tariffs pull resources toward goods a country makes at higher cost, which is an opportunity cost of protection even when the protected industry itself grows.

Arguments For and Against a Trade War

Arguments for

• Shields domestic companies from what supporters view as unfair foreign competition
• Shifts demand toward domestic goods
• Supports local employment in protected industries
• Can help reduce a bilateral trade deficit
• Gives leverage against a country with subsidies, intellectual property theft or other practices that negotiations have not fixed
• Preserves domestic capacity in strategic sectors such as defense or advanced manufacturing, even when imports would be cheaper

Arguments against

• Raises costs for businesses and consumers and can add to inflation
• Reduces product choice and can cause shortages
• Invites retaliation against exporters
• Discourages trade and can slow economic growth
• Damages diplomatic ties and can spread to countries not originally involved

The strategic-capacity argument is the one critics most often accept in part. Buying weapons or critical components on the world market may be cheaper, but a country may still value producing them at home.

Limitations of a Trade War as a Policy Tool

A trade war rarely delivers a clean result. Retaliation means the initiating country’s exporters pay part of the price, so the net effect depends on both sides’ measures, not just the first tariff. Bilateral deficits may shrink while imports shift to other countries, leaving the overall deficit less changed. Currency moves can offset tariffs, as the yuan’s 2019 decline partly did.

Ending a trade war is also harder than starting one. The U.S.-China case shows that truces and agreements tend to pause escalation rather than remove existing barriers, and tariffs created as temporary leverage can persist across administrations.

FAQs

The Bottom Line

Trade wars matter to consumers, manufacturers that buy imported inputs, and exporters exposed to retaliation, since costs spread well beyond the first tariff. The record from Smoot-Hawley to the U.S.-China dispute shows that truces tend to pause escalation rather than remove barriers. Tariffs introduced as temporary leverage can last across administrations, so their effects on prices and targeted sectors such as agriculture can persist for years.