Economic Impacts of the 2025 Trade Wars

Abstract

This paper evaluates the economic consequences of the 2025 trade policy, focusing on the "reciprocal tariffs" initiated by the United States, the corresponding retaliatory measures by its trading partners, and the recent trade agreement between the United States and China. We employ a multi-region, multi-sector computable general equilibrium model to assess the macroeconomic effects of alternative tariff scenarios. Our results reveal significant global trade realignments and welfare redistribution resulting from the worldwide tariff shock introduced by the United States. In a scenario where the United States imposes a uniform 10% tariff on imports from the rest of the world along with higher tariffs on China, sector-specific tariffs on Canada and Mexico, and a 20% tariff on the EU with retaliation, Canada experiences substantial welfare losses of $60.02 billion, followed by Mexico with losses of $14.13 billion. China records a welfare loss of $94.48 billion, and the United States incurs a welfare loss of $85.36 billion. Tariffs lead to notable commodity price increases in key U.S. sectors, including gas (6.46%), leather (15.95%), and wearing apparel (14.02%). Vietnam and other Asian economies partially offset reduced U.S. imports from China, reshaping bilateral trade patterns. In the U.S. labor market, skilled labor wages decrease by 1.76% and unskilled labor wages decline by 1.78%. These findings highlight the complex sectoral and market adjustments triggered by escalating trade tensions.

Keywords: Trade Wars, Tariffs, General Equilibrium

JEL Classification: F11, F12, F13, F17