Content Editor, Dunham | 2025 ThinkAdvisor Luminary Award Winner | 2026 Wealthies Finalist — Thought Leader of the Year | Macroeconomics, markets, geopolitics & global trends
Trade wars are often discussed as isolated policy disputes.
A tariff here, a retaliatory measure there. But in reality, they unfold as interconnected economic events that extend well beyond trade policy alone.
Tariffs can alter supply chains, retaliation can amplify economic stress, and currency pressures often emerge as countries attempt to offset trade disadvantages.
Over time, these forces can feed on themselves - interacting with global imbalances, inflation, and financial stability in ways that policymakers don’t always anticipate. They can even lead to outright conflict (as we saw pre-WW2).
Remember, history moves in waves.
Globalization has never moved in a straight line. Past waves - from the late-19th-century boom to post-1930s protectionism and the post-1980s revival - show how periods of free trade often give way to fragmentation. And today’s environment increasingly looks like another turn in that cycle - marked by rising protectionism and de-globalization.
Figure 1: Dunham, 2026
And as is often the case in economics, these waves are neither inherently good nor bad - they simply produce different winners and losers.
The sections below explain how modern trade wars work, from tariffs and retaliation to currency wars and broader systemic risks, and how these dynamics connect across the global economy.
How Trade Wars Actually Work
Trade wars are often framed as simple disputes over tariffs or protectionism. In reality, they are far more complex - and far more consequential.
What begins as a policy decision to raise tariffs or “rebalance trade” rarely stays confined to borders or balance sheets. Trade wars ripple through currencies, capital flows, inflation, and global growth, reshaping the economic landscape in ways that policymakers often underestimate.
In recent years, trade tensions between the United States, China, and Europe have brought these dynamics back to the forefront. Tariffs have returned as a favored policy tool. Currency pressures have intensified. And long-standing global imbalances are being tested in real time.
This page serves as a guide to understanding how trade wars actually work - from tariffs and retaliation to currency wars and systemic risk - and how these forces connect across the global economy.
Tariffs are usually the opening move in a trade war.
Governments impose tariffs to try to protect domestic industries, reduce trade deficits, or gain leverage in negotiations. In theory, tariffs raise the cost of imported goods, encourage domestic production, and improve a country’s trade position.
In practice, tariffs often trigger retaliation.
Trading partners respond with their own tariffs, escalating tensions and distorting supply chains. Costs rise for businesses and consumers alike, while global trade volumes slow. Rather than delivering clean economic wins, tariffs tend to redistribute pain — often unpredictably.
China vs. Europe: The Next Front In The Trade War?
Trade wars rarely remain bilateral.
As global supply chains have become more interconnected, trade tensions between two countries often spill over into broader conflicts involving major economic blocs.
For instance, as the U.S. imports less from China, China is offsetting that difference abroad - specifically into Europe.
And this has irked the European Union as it's now dealing with a flood of Chinese goods.
Recent disputes between China and the European Union highlight how trade wars can expand beyond their original targets.
These conflicts aren’t just about goods. They reflect deeper strategic competition over industrial dominance, technology, and long-term economic influence.
Tariffs are only one front in a trade war. When tariffs fail to deliver the desired outcomes, pressure often shifts to currencies.
Currency wars occur when countries attempt to weaken their currencies to gain a competitive advantage in trade - either by nullifying tariffs from other countries or helping their own balance of trade.
For instance, a cheaper currency makes exports more attractive and offsets the impact of foreign tariffs. But it also raises import costs and fuels inflation.
Once currency devaluation becomes a policy tool, trade disputes move into a far more worrying phase. Exchange rates, capital flows, and central bank credibility all come into play amid a "race to the bottom" (everyone undercutting each other - as we saw in the 1920s).
And currently, it looks like the U.S. under President Trump is going to allow the U.S. dollar to weaken to aid the tariffs, helping close the trade deficit: The Trade War’s Second Act: Currency Wars
The U.S. Dollar and Global Liquidity
No discussion of trade wars is complete without addressing the U.S. dollar.
Because the dollar sits at the center of the global financial system, shifts in trade policy often interact with global dollar liquidity in unexpected ways. Tariffs, capital controls, and trade disruptions can tighten dollar funding conditions abroad, even when U.S. policy appears accommodative.
A stronger dollar can amplify trade imbalances and financial stress in emerging markets, while a weaker dollar reshapes inflation dynamics at home.
To explore how dollar movements intersect with trade wars and global liquidity, see:
Trade Deficits, Fiscal Policy, and Structural Imbalances
Trade wars are often justified as a way to reduce trade deficits. But deficits are rarely just a trade issue.
They reflect deeper structural forces - including fiscal policy, savings behavior, consumer spending, demographics, and capital flows. Without addressing those underlying drivers, tariffs alone tend to simply move deficits geographically rather than eliminate them.
For example, China's chronic trade surpluses are a symptom of an anemic consumer in China. The weakness means they must offset their produced goods abroad at lower prices - or risk unemployment at home (if no one is buying domestically or abroad - layoffs and bankruptcies can follow).
A closer look at some of China's imbalances can be found here:
Understanding the relationship between trade deficits, fiscal policy, and global imbalances is critical to evaluating whether trade wars can achieve their stated goals.
When trade wars, currency pressures, and structural imbalances collide, questions about the global monetary system inevitably follow.
Periods of prolonged trade conflict have historically coincided with shifts in currency regimes - from devaluations (like the 1920s currency wars) to formal resets (think Bretton Woods).
While such outcomes are rare - the risk rises when economic stress becomes widespread and policy coordination breaks down.
Whether today’s trade tensions could eventually force a broader currency realignment is explored here: The Coming Global Currency Reset
Why Trade Wars Matter More Than Ever
Trade wars are not isolated policy disputes. They are system-wide stress tests.
Tariffs can disrupt supply chains. Currency wars can destabilize financial markets. And unresolved imbalances can undermine long-term growth. Together, these forces shape inflation, investment, and economic stability far beyond the countries that initiate them.
Understanding how trade wars evolve - and how their effects spread - is essential for navigating today’s global economy.
This page will continue to evolve as new developments emerge, serving as a central resource for understanding the forces driving modern trade conflicts and their broader economic consequences.
This page serves as the central hub in Dunham’s Trade Wars series, connecting research on tariffs, currency dynamics, global imbalances, and systemic risk. We will add more to this page as new pieces are published.
Disclosures:
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance. All examples are hypothetical and are for illustrative purposes only.
Information contained in the materials included is believed to be from reliable sources, but no representations or guarantees are made as to the accuracy or completeness of information. This document is provided for information purposes only and should not be considered as investment advice.
Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/Dealer. Member FINRA/SIPC. Advisory services and securities offered through Dunham & Associates Investment Counsel, Inc.
