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Potential Consequences of a Trade War

Today, stocks fell sharply out of fear of a trade war between the United States and China. On Thursday, President Trump announced that he has asked the United States Trade Representative to consider $100 billion in trade tariffs against China, in addition to the tariff he proposed earlier in the week on 106 US products. US and global markets plunged. The S&P 500 fell 2.2 percent and NASDAQ fell 2.3 percent. Today the major averages closed at the lowest they had all week due to the persistence of volatile trading throughout the day as a result of Treasury Secretary Steven Mnuchin revealing the possibility of a trade war with China.

Many have warned that a trade war could be hazardous to the health of the global economy. Benoit Coeure has warned that if the US and China were to adopt protectionist trade policies, the global economy could experience “severe shocks”. The economist has also said that changes in tariffs could result in a 2.5% baseline reduction in the United State’s economic forecast. The Trump administration would be wise to use history as a guide as it pushes for increased tariffs on China. The US pursued protectionist trade policies with the Smoot-Hawley Tariff Act of 1930, which unintentionally increased the economic strain on the nation and prolonged the Great Depression. While the circumstances in 1930 are not the same as today, the negative consequences that this trade war had on the United States should be a point of concern for the trump Administration, especially considering the impact that these discussions have already had on the performance of the stock market.

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3 thoughts on “Potential Consequences of a Trade War

  1. faithepinho

    Reading economic news whilst in a macroeconomic class has proven very amusing... Government officials can make whatever fiscal or monetary policy they like, but many times, the economy responds most quickly to politics!

  2. croughanm20

    It is astounding to think of just how interconnected the economy is today. Even comparing now to 50 years ago, the scope of the global economy has advanced to be an extremely complex web. Trumps proposal for these tariffs will evidently not just be a consequence for the US and China, it will send ripples throughout the global economy instantaneously. Even just the threat of these tariffs already has economies ready to adjust.

  3. skinnerf20

    It is amazing to witness what seems to be a dart toss from politicians when attempting to remedy the economy. Clearly, based on history, tariffs have a net negative effect on the economy. This harm is mostly felt by those who the tariff is seemingly pandering to- the blue collar worker and farmers. China's responsive tariffs are particularly problematic to the farmers of the midwest as China is a prime importer of soybeans from this particular group.

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