Trade wars are costly for households and businesses. Even when tariffs only affect certain industries, they still slow the global economy. They have a wide variety of direct and indirect effects that are difficult to model and quantify.

In addition to the damage done to economic growth, trade wars also raise household costs through higher taxes. For example, in 2024, trade war tariffs generated an additional $264 billion of higher customs duties collected for the US government from importers. Before behavioral effects, this translates to a yearly tax increase of about $625 per US household. This estimate does not take into account the lower incomes as tariffs reduce output and the loss in consumer choice due to higher prices for substitutes that do not face tariffs.

The magnitude of these losses depends on the extent to which trading partners retaliate against the United States. When trade wars are not accompanied by foreign retaliation, real GDP losses decrease to 0.5%. This is because a larger manufacturing boom under no retaliation requires a bigger nominal wage adjustment when protection ends, generating more involuntary unemployment.

The best way to mitigate the impact of a trade war is for both sides to negotiate a settlement. This would bring a sense of calm to markets, and allow business leaders to rethink their investments and supply chains. To maximize the chances of success, negotiations should be time-bound and backed by firm deadlines. The escalation of tariffs should be suspended, but the United States should reserve the right to reimpose them if it believes China is undermining negotiations or failing to honor its commitments.