A full-scale trade war, triggered by US President Donald Trump's proposed 25 per cent tariff on all imports, could cause a $1.4 trillion hit to the global economy, according to a new study.
The research, conducted by economists at Aston University, models the worst-case scenario where the US's major trade partners retaliate, leading to a spiral of economic disruption, rising prices, and falling living standards.
What Is A Trade War?
A trade war happens when one country imposes tariffs (import taxes) on goods from other countries, and those countries retaliate with their own levies. This can hurt businesses, increase costs for consumers, and slow down economic growth worldwide.
How Would Trump's Tariffs Work
Trump has called his tariff plan "Liberation Day" and aims to set up a "reciprocal" tariff system, where all imports face a 25 per cent tax. His idea is to encourage American manufacturing and reduce dependence on foreign goods. This plan could backfire and hurt both the US and its trade partners, as per the report.
Who Will Be Affected?
The trade war would begin in North America, affecting the US, Canada, and Mexico before causing ripples across Europe and the rest of the world. In the initial phase:
- Exports and imports for the US, Canada, and Mexico drop significantly
- Mexico's real income falls by 5 per cent due to reduced trade activity
- Canada and China retaliate, worsening Mexico's economic losses
The study analysed a few scenarios using trade data from 132 countries in 2023. Here's what could happen:
Trump imposes a 25 per cent tariff on Mexico and Canada, plus a 20 per cent tariff on China.
- Canadian exports drop by 20.4 per cent
- Mexican exports fall by 22.5 per cent
- Mexico's economy suffers a 5 per cent loss in real income
Canada, China, and Mexico retaliate
- Trade between North America and China shrinks
- US businesses face higher costs, passing them onto consumers
US extends tariffs to the EU
- Ireland faces the worst impact in Europe
- European markets struggle with increased costs
EU retaliates, expanding the trade war
- The UK sees mixed effects - disruptions but also new trade opportunities
- Japan and South Korea experience minor benefits from redirected trade
Global tariffs lead to widespread trade losses
- Even non-involved countries feel the economic squeeze
- Higher costs impact global supply chains
Full retaliation: $1.4 trillion economic loss
- US imports and exports plummet
- Global trade efficiency declines, driving up inflation
Lessons From The 2018 US-China Trade War
The situation is similar to Trump's 2018 trade war with China, where both countries imposed billions in tariffs on each other. The result was-
- Higher prices for American consumers
- Farmers and manufacturers suffered losses
- China found new trade partners, reducing reliance on the US
Could Some Countries Benefit?
Yes, some nations might gain from trade diversions. When the US and China stopped trading some goods in 2018, countries like-
- Vietnam saw a boom in electronics and textiles exports
- Mexico increased manufacturing exports to the US
- India boosted exports of pharmaceuticals and agricultural products
If Trump's 2025 tariffs take effect, the UK, India, Japan, and South Korea could fill gaps left by disrupted trade between the US and its major partners.
Economic Impact On The US And World
The study's worst-case scenario suggests that -
- The global economy could lose $1.4 trillion in trade and investment
- Prices in the US could rise sharply
- Countries may shift away from US trade
What Can Countries Do?
To protect themselves, countries might -
- Diversify trade agreements: Strengthening agreements with India, ASEAN, and CPTPP members to find alternative markets
- Strengthen domestic industries: Nations may focus on self-reliance to reduce dependence on American and Chinese markets
- Work with global trade organisations: Countries could challenge the tariffs through the World Trade Organisation (WTO)
The study also compares the situation to the 1930s Smoot-Hawley Tariff Act, which worsened the Great Depression by reducing international trade.
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