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The trade war resulting from President Trump’s Section 232 tariffs on steel and aluminum will have a wide impact across global economies. It will crimp demand for real fixed investment (think buildings and cars), put pressure on equities, and slow economic activity globally.

As the US and its trading partners retaliate, their imports from each other will fall. The amount they lose depends on the elasticity of demand, which economists try to measure by looking at how imports change with a one-percent increase in their price. In general, though, higher tariffs lead to lower imports.

We expect the EU to lose more than the rest of the world, as it tries to limit damage with special carve-outs for vehicles and chemicals. The bloc also wants to avoid damaging transatlantic defense cooperation. But, as Trump’s tariff zigzags show, it is hard to predict his next move.

The same is true for China. While it would like to minimize the loss of its exports, a trade war will reduce output and prices at home. In that case, domestic manufacturers will have to compete with cheaper foreign goods, causing them to cut investments in new production lines and hiring. This will hurt skilled workers more than unskilled ones, who would benefit from the lower prices of the imported products they produce. The net effect is that overall consumption will decline, and the government’s tax revenues will fall. This is not what the country needs at a time when monetary stimulus is wearing off and oil prices are elevated.