The Hidden Costs of a 2025 Trade War

A sweeping US tariff escalation would trigger a global economic contraction, according to a new study in The World Economy. By simulating a 60-point hike on Chinese imports, researchers found that the resulting trade war would not only slash American GDP by 1.3% but also force a volatile reorganization of global supply chains.

Editorial·September 30, 2026·reads: 469

Using the MIRAGE-Power model, researchers Antoine Bouët, Leysa Maty Sall, and Yu Zheng mapped the ripple effects of a 2025 trade conflict. Their findings suggest that while tariffs are often framed as a tool for domestic industrial growth, the reality involves a complex trade-off: protected sectors gain, but exporters suffer and consumer prices rise. By 2030, the model projects a 0.5% drop in world GDP, with the United States and China bearing the brunt of the losses. Retaliatory measures from trading partners prove particularly damaging, deepening the domestic GDP decline from 0.7% to 1.3% compared to a non-retaliatory scenario.

The study highlights that protectionism fails to stop at the border, instead forcing a global shift in trade flows. As US-China trade ruptures, Chinese exporters are expected to pivot toward markets in Europe, Canada, and Mexico. While countries like Mexico might see short-term gains from preferential access, these benefits remain fragile; if exemptions vanish or trade wars expand, these nations face immediate economic contraction. Furthermore, the researchers debunk the notion that customs duties could replace federal income taxes, noting that an 80% tariff would maximize revenue at $819 billion—a fraction of the $2 trillion collected through income tax—while simultaneously shrinking the import base and stifling global economic activity.