GDP impacts with retaliation

Other countries are now likely to respond with retaliatory tariffs on US imports. Canada (the largest destination for US exports), the EU and China have all said they will respond in kind.

To estimate the impacts of this tit-for-tat trade standoff, I use a global model of the production, trade and consumption of goods and services. Similar simulation tools – known as “computable general equilibrium models” – are widely used by governments, academics and consultancies to evaluate policy changes.

The first model simulates a scenario in which the US imposes reciprocal and other new tariffs, and other countries respond with equivalent tariffs on US goods. Estimated changes in GDP due to US reciprocal tariffs and retaliatory tariffs by other nations are shown in the table on this page.

The tariffs decrease US GDP by $438.4 billion (1.45%). Divided among the nation’s 126 million households, GDP per household decreases by $3 487 per year. That is larger than the corresponding decreases in any other country.

Proportional GDP decreases are largest in Mexico (2.24%) and Canada (1.65%) as these nations ship more than 75% of their exports to the US. Mexican households are worse off by $1 192 per year and Canadian households by $2 467.

Other nations that experience relatively large decreases in GDP include Vietnam (0.99%) and Switzerland (0.32%).

Some nations gain from the trade war. Typically, these face relatively low US tariffs and consequently also impose relatively low tariffs on US goods. New Zealand (0.29%) and Brazil (0.28%) experience the largest increases in GDP. New Zealand households are better off by $397 per year.

Aggregate GDP for the rest of the world (all nations except the US) decreases by $62 billion.

At the global level, GDP decreases by $500 billion (0.43%). This result confirms the well-known rule that trade wars shrink the global economy.