As President Trump pushes the United States into a trade war with China, the trade-offs are often described as higher consumer prices and inflation versus the potential to bring back manufacturing jobs that Americans lost over the last three decades.
But the economic showdown between Trump and Chinese President Xi Jinping is about much more than the price of an iPhone or a pair of Hoka shoes.
An extreme, protracted trade war between the two global superpowers brings profound risk that, economists say, could destabilize the world economy, trigger a global recession and plunge millions into poverty. It could also transform the balance of global power in ways that fundamentally undermine U.S. standing in the world.
“There is a good chance that this is something that isn’t just printed in the newspapers today, but is in history books decades from now,” said Jason Furman, professor of the Practice of Economic Policy at Harvard Kennedy School and former chairof then-President Obama’s Council of Economic Advisors.
“This undermines the core of American power,” Furman said. “The United States has had on its side of the ledger a set of alliances that are much deeper, much more enduring than any alliances that China has. This is severely testing that big advantage that the United States has had by infuriating our allies in a way that we may not be able to recover from.”
On Thursday, the leader of the International Monetary Fund warned that new forecasts showed Trump’s tariffs would slow this year’s growth of the world economy.
“Our new growth projections will include notable markdowns, but not recession,” the I.M.F. managing director Kristalina Georgieva said. “We will also see markups to the inflation forecasts for some countries.”
Trump has stated that his goal — a key plank of his “America first” agenda — is to invigorate U.S. manufacturing. “Jobs and factories,” he has promised, “will come roaring back into our country.”
But many economists across the political spectrum are skeptical that the chaotic trade war Trump has unleashed will usher in the production of significantly more U.S. goods or jobs. They warn that the president’s frenetic rollouts of tariffs — only to walk some of them back — could harm the U.S. economy and jeopardize its future as a high tech hub.
“The U.S. is exporting a lot of high-value services: software, Hollywood, banking — that’s where the future lies,” said Jayant Menon, a senior fellow at ISEAS-Yusof Ishak Institute in Singapore who previously served as lead economist at the Asian Development Bank. “[Trump] is risking economic growth, he is risking access to technology that comes through trade and investment.”
Menon argued the U.S. economy is faring well: “Don’t mess with something that’s working,” he said.
But there have been winners and losers in the U.S. economic overhaul.
Over the last few decades, blue-collar communities from Michigan to West Virginia have been hollowed out by the mass decline of American manufacturing, from steel to automobiles. As the U.S. economy has pivoted to service and tech economies, income inequality has soared, leaving many Americans without college degrees struggling.
Trump and his supporters often frame the tariff fight as trying to make life better for communities hit hard by the pull of jobs overseas. Experts, however, say the U.S. faces steep hurdles to returning to its 1970s manufacturing heyday. It’s unlikely, they argue, that Trump’s extreme tariffs would solve chronic job losses or lead to more affordable goods.
Last week, Trump calmed some of economists’ worst fears when he abruptly paused steep tariffs on imported goods from most foreign countries for 90 days. But the remaining 10% tariff is still the largest such hike in decades, and many long-standing allies are left reeling.
Meanwhile, Trump escalated his standoff with China, raising duties on Chinese imports to 145% — a move that prompted Beijing to retaliate by raising its levies on U.S. goods to 125%.
“Countries will now start to look at trading in the world without the U.S.,” Menon said. “And so the U.S. — if they want to continue consuming all the goods that they’re so used to consuming — will have to start paying very high prices.”
The poor will bear the brunt of tariffs
For Americans, tariffs on Chinese goods could raise prices on household items as varied as aluminum foil, syringes, toys and textiles.
“It would hurt American consumers, for sure, because it is simply almost impossible to quickly find another China that can produce things fast, efficiently and at low cost,” said Zongyuan Zoe Liu, a senior fellow for China studies at the Council on Foreign Relations. “There is simply no alternative in the short term.”
The poor would be hit the hardest.
“The lower your income is, the more reliant you are on imported goods from abroad, mostly because a larger fraction of your consumption is goods relative to services,” Furman said. “The more affluent you are, the more you’re spending money on yoga lessons and restaurant meals that aren’t going up in price that much.”
The cost of cheap, nonbranded fashion clothes and low-value items, in particular, will skyrocket as smaller Chinese firms no longer qualify for a trade loophole that exempted packages valued under $800 from customs duties and taxes, said Wendong Zhang, an assistant professor of applied economics and policy at Cornell.
Treasury Secretary Scott Bessent has stated the American dream depends on the creation of new jobs and affordable mortgages and cars, not “cheap baubles from China.”
But the Trump administration has added a 25% tax on imported vehicles and car parts — a development that Goldman Sachs predicts could mean vehicle net prices will rise roughly $2,000 to $4,000 over the next six months to a year.
The Yale University Budget Lab forecast last week that Trump’s tariffs would lead to a $4,689 decline in the average U.S. household’s disposable income. Low-income households would take a smaller hit in dollar terms, but the amount would represent a larger share of their income.
Questions about a comeback for American manufacturing
Trump is betting that many Americans, or at least the bulk of his supporters, will put up with inflated costs of foreign goods in the short term if it eventually brings more jobs.
His supporters maintain that the tariffs hit China hard by increasing prices, straining its economy and bringing new jobs to America. They also claim the tariffs will help make the American tech and innovation economy more competitive.
But economists note that domestic manufacturing of motor vehicles and electronic products is heavily reliant on imported raw materials such as steel and aluminum and complex components such as semiconductors and computer chips.
Adding to the challenges, many Americans are unwilling to take factory jobs for the ultra low wages that many workers earn overseas.
“The workforce is not keen to go back to the kinds of industries that have left the U.S. for other countries,” Menon said, citing factories in Cambodia where workers produce garments and footwear.
“They’re not really sweatshops, but they’re as close as you can get to them,” Menon said. “Mostly women sit there at sewing machines all day doing very, very tedious work. … If this is what he thinks these tariffs will do, it’s not going to work that way.”
At the moment, Menon said, clothes are produced overseas at very competitive rates and most of the value occurs in the U.S. when the goods are branded and sold in retail stores. In that sense, he argued, “the U.S. is getting most of the returns from globalization.”
Moreover, automation has intensified so much that a boost in manufacturing would be unlikely to create a significant number of jobs. Trump’s supporters insist his policies could lead to higher wages for American workers than those currently doing the work overseas. But it is unclear exactly how, especially as machines and artificial intelligence increasingly take over work once done by humans.
“A lot of positions are done by robots,” Zhang said, noting that a food manufacturing factory in northern China that used to hire 200 workers now generates twice the output with only five workers supervising robots and machines.
Domestic manufacturing could potentially be bolstered if the U.S. engaged in more trade within North America, especially Mexico. But for now, progress on that front is uncertain, Zhang said, after Trump imposed 25% tariffs on many Mexican and Canadian goods.
Trade war could upend American business
A tariff war would force companies to reorient supply chains.
American manufacturing businesses that rely on imported parts from China would face increased production costs, Liu said, which would hurt America’s export competitiveness.
“You’re reducing markets for American manufacturing companies,” Furman said. “There’s no doubt in my mind that the U.S. economy is going to be smaller because of this and foreign economies will be smaller because of this.”
Farmers in the rural U.S. stand to lose the most, but the Trump administration could ease their pain by providing trade aid as it did during its 2019 trade war with China, Zhang said. In China, he said, the losers will mainly be manufacturers in the coastal provinces, especially those that rely on overseas trade.
Smaller firms in the U.S. and China would probably be most affected because they lack the ability, compared with multinational firms, to shift production and diversify by choosing different locations.
Even if Trump ultimately lowers his tariffs, his twisting and turning policies probably will cause many businesses to hesitate before investing here.
“If you want to build a factory in the U.S. that relies on parts that come from Mexico or from China or from Cambodia, that’s less attractive,” said Stan Veuger, a senior fellow in economic policy studies at the American Enterprise Institute. “If you want to build a small consumer goods company that imports its products from Malaysia, that’s riskier than before. So maybe some of those investments just won’t happen.”
Can China and the U.S. really decouple?
An intense trade war would dramatically reduce trade between the U.S. and China. Together, the two nations make up 43% of the global economy, according to the International Monetary Fund.
“At some point, a 100% or 200% tariff, the actual number no longer matters, because it’s basically meaningless to do trade,” Liu said.
If China and the U.S. decoupled their economies, duplicate supply chains would emerge — one that involves China and one that involves the U.S.
But no matter how much Trump wants the U.S. to decouple from China, his administration’s recent exemption of electronics shows that, at least when it comes to technology, it’s hard to do.
“Both economies are deeply integrated,” Zhang said, noting that China is a dominant supplier for many consumer products, including electronics and rare earth metals.
Who stands to lose the most?
Economists agree that no nation benefits — at least in the short term — from the Trump administration’s disorderly tariff rollout.
“At the end of the day, there is no clear winner,” Zhang said, noting that both China and the U.S. would suffer significant disruptions: The U.S. real gross domestic product could lose more than 2.5%, he said, but the Chinese economy could lose a lot more in percentage terms.
“In terms of global power and the global economy, this is sort of a lose-lose proposition,” Zhang said.
Intense domestic competition in China would probably force industrial consolidation, Liu said, resulting in the shuttering of Chinese factories and laying off of workers. Long-term unemployment could be bad for social stability. Household income growth would stagnate, which runs against government plans to boost domestic consumption.
“If the Chinese government can usher in stimulus measures so big they can offset a lot of these protectionism policies, there is a chance that maybe they could narrowly escape the recession,” Liu said. “But recession and stagnated growth are two different things, and neither is good.”
Liu remained hopeful that a full decoupling was unlikely and that the trade tension could still be resolved through negotiation, citing Trump’s signaling that he respects Xi and China’s acknowledgment that no one wins in a trade war.
In the long term, Menon predicted, China will emerge as the big winner.
“They will increase their influence in this region for sure, but also globally,” he said. “I think China will act bigger now and maybe give in a bit more, because they will see that they have a more important role to play, which will have strong returns. This will end up marginalizing the U.S. even further.”