How does the trade war affect the US economy?

The US trade war, characterized by aggressive tariff increases and retaliatory measures, has reshaped the economic landscape both domestically and globally. Its effects are complex, touching nearly every sector and household in the country.

Slower Economic Growth

The trade war has significantly slowed US economic growth. The IMF cut its 2025 US growth forecast from 2.7% to 1.8%, after robust growth in the two previous years. The World Bank also warned of a global slowdown, with US trade policies cited as a major factor disrupting international trade and amplifying economic uncertainty. Analysts expect the US to experience the sharpest slowdown among major developed economies in 2025, with growth possibly dropping to between 0% and 0.5%.

Rising Prices and Inflation

Tariffs function as taxes on imports, raising costs for US businesses and consumers. In 2025, the average US household is expected to pay nearly $1,200 more due to higher prices from tariffs. The Budget Lab at Yale projects that tariffs will push US inflation up by 2.3% in the short run, with apparel prices rising by 33% and food prices by 4.5%—three times recent grocery inflation. These increases hit middle- and lower-income households hardest, as they spend a greater share of their income on essentials.

Sectoral Shifts and Employment Effects

Tariffs have led to a modest increase in US manufacturing employment, but this has come at the expense of jobs in the service and agricultural sectors. Overall employment has declined, as lower real wages reduce labor-force participation. Real income in the US is projected to fall by about 1% by 2028, with some states experiencing declines greater than 3%. Around half of US states are expected to see real income losses, with the hardest-hit states losing more than 3%.

Business Investment and Uncertainty

The unpredictability of trade policy has frozen or reduced business investment and consumer spending. Companies face higher input costs, disrupted supply chains, and squeezed margins, especially in sectors like autos, electronics, and apparel. Consumer and business sentiment indicators have dropped sharply, and if financial market turmoil persists, it could further weigh on investment and household consumption.

Federal Revenue and Budget Impact

Tariffs have increased federal tax revenues, with 2025 collections estimated at $156.4 billion—the largest tax hike since 1993. However, this revenue does not fully offset the negative effects of slower economic growth and higher prices.

Regional and Global Spillovers

The impact of the trade war is uneven across US states, with about half experiencing real income declines. Major trading partners like Canada, Mexico, and China have also suffered significant economic losses. Europe and other countries may benefit from diverted trade flows, but the overall effect has been negative for global economic stability.

Recent Developments and Outlook

In May 2025, the US and China agreed to roll back some tariffs, reducing US rates from 145% to 30% and Chinese tariffs from 125% to 10%. While this step may help ease inflation and support investment, it does not undo the significant damage already inflicted by elevated costs, disrupted supply chains, and weakened US credibility with allies. The ongoing reliance on erratic trade policy continues to undermine long-term economic resilience.

Conclusion

The US trade war has delivered slower growth, higher prices, and greater uncertainty. While some manufacturing jobs have returned, these gains have been offset by losses in other sectors, reduced real incomes, and uneven impacts across states. The broader costs—to consumers, businesses, and the global economy—have outweighed the benefits, and the outlook remains uncertain as trade tensions continue to shape economic policy and performance.