Despite rising protectionist tendencies, a trade war is unlikely to escalate in the immediate future. But it’s important to understand the implications of the current tension.

In a trade war, nations impose tariffs or other barriers to restrict foreign imports and exports. This raises costs for consumers and reduces incomes for firms. Firms may respond by reducing output, increasing prices, or both. They can also try to negotiate a trade agreement with the nation they are restricting imports from or threaten to pull out of the World Trade Organization (WTO).

The opening salvos of Trump’s trade war have included tariffs on steel, aluminum and solar panels. In response, China, the European Union and Canada have imposed retaliatory tariffs on American goods including motorcycles, whiskey and apples. The combination of pending and threatened retaliatory tariffs affect more than $330 billion in U.S. exports, and the cost of imported components for US-made goods will rise. A large share of these imports are intermediate inputs, such as steel and aluminum, that are used to manufacture final products like cars or washing machines. The increase in costs will raise the price of these goods for US consumers and reduce their competitiveness in global markets.

While a trade war is usually bad for both countries at the aggregate level, there are likely to be winners and losers. Some workers, for example, at domestically focused companies, may benefit from lower prices as production shifts to the local economy. Other workers in the EU, Mexico and China could see their incomes reduced by higher prices or reduced access to inputs.