A new report published by the UK’s Aston Business School estimates the global economic fallout from US tariffs will have a significant impact on trade flows, prices, production and welfare.
The report’s authors Professor Jun Du and Dr Oleksandr Shepotylo from Aston Business School’s Centre for Business Prosperity explain that Trump’s tariffs in early 2025 have already triggered a wave of reactions and retaliation.
Following Trump’s so-called ‘liberation day’ US imports from Mexico and Canada are subject to 25% tariffs, China’s total levies are now 54% following a 34% increase announced on 2 April.
India has also seen a sharp tariff increase of 26% while Thailand has seen a 36% increase in tariffs for US-bound goods. Goods coming from Cambodia are subject to a 49% duty increase and from Bangladesh, 37%. Pakistani imports will see a 29% tariff hike while Myanmar imports are subject to a 49% tariff increase.
The UK is to be hit with a 10% tariff hike.
This has led to countermeasures rolling out across Europe, Asia and the Americas.
Using core economic principles and a structured gravity approach – an economic framework that studies and quantifies the effects of various determinants of international trade – the report analyses 2023 bilateral export data and gross domestic product (GDP) for 132 countries.
It also models welfare changes as measured by changes in real (net of inflation) income per capita.
Global economic impacts across the most likely US tariff scenarios
The report outlines the six most likely scenarios with predictions on what could happen for each one.
The authors point out Trump’s tariffs promise US industrial gains, however their findings reveal broader costs with trade volume reductions being observed across all scenarios and the most severe contractions occurring under full global retaliation.
The true cost of protectionist policies:
- Price indices rise significantly in the US, Canada, Mexico, China, and the EU, leading to consumer welfare losses
- Production adjustments vary, with certain domestic industries benefiting from
protectionist policies, but overall economic welfare declining due to inefficiencies and reduced competitiveness - The most significant economic losses occur under comprehensive trade war scenarios, emphasising the high costs of protectionist policies.
The six scenarios with predicted outcomes:
Scenario 1 – US initial tariffs
Tariff measures: US 25% on Mexico and Canada, excluding energy tariffed at 10%
(20.6% weighted), +20% on China
Key findings and economic effects: US prices rise by 2.7%, with real GDP per capita
falling 0.9%, while Canadian and Mexican welfare decline by 3.2% and 5.0%, respectively, with notable trade contractions
Scenario 2 – Retaliation by Canada, Mexico, China
Tariff measures: Reciprocal tariffs by Canada, Mexico, China on US
Key findings and economic effects: It deepens these losses significantly, with
welfare reductions reaching 5.1% for Canada and 7.1% for Mexico, alongside substantial US welfare losses (1.1%)
Scenario 3 – US tariffs on EU
Tariff measures: Scenario 2 + 25% on EU goods
Key findings and economic effects: Sharp transatlantic trade contraction: EU
production disruptions, notably impacting EU nations and significantly reducing US welfare (-1.5%)
Scenario 4 – EU retaliates
Tariff measures: Scenario 3 + EU: 25% on US goods
Key findings and economic effects: US/EU prices rise, mutual welfare losses. It
intensifies negative outcomes for the US. (-1.6% welfare), although countries like the UK experience modest trade diversion benefits.
Scenario 5 – US global tariff
Tariff measures: US: 25% global tariff (excluding China which is tariffed at current level + 20% tariff and Canada which has a lower 10% tariff on energy)
Key findings and economic effects: It severely intensifies global trade contraction,
substantial price hikes, dramatically affecting North American welfare (US: -2.0%, Canada: -5.1%, Mexico: -7.2%) and UK trade volumes
Scenario 6 – Full global retaliation
Tariff measures: Comprehensive global reciprocal tariffs where all partners retaliate with the same levels of tariffs on US.
Key findings and economic effects: This results in extensive global disruptions,
including severe US welfare losses (-2.5%), dramatically reduced trade flows worldwide, and a $1.4tn global welfare loss.
Importance of coordinated global policy frameworks
The report explains the scale of economic losses witnessed during the 2018 US-China trade conflict, estimated at approximately $51bn, offers a recent empirical benchmark relevant to Scenarios 1 to 4.
From a policy perspective, Trump’s tariff strategy, potentially influenced by Miran’s (2024) objectives of addressing dollar overvaluation, significantly challenges World Trade Organization stability and established multilateral trade norms.
Unilateral tariff impositions risk triggering retaliatory trade wars, undermining intended economic gains by provoking global market instability and currency volatility.
This underscores the critical importance of coordinated international policy frameworks to manage these risks effectively.
Policymakers must therefore prioritise reinforcing cooperative trade institutions to prevent recurrence of historical protectionist missteps and ensure a stable global economic environment.
The report’s key findings
- Global economic toll: Trump’s tariffs trigger a trade war, slashing global welfare by up to $1.4tn with widespread price hikes and inefficiencies
- Retaliatory spiral: Major economies’ countermeasures amplify losses, undermining trade norms and echoing theoretical warnings of escalation
- Theoretical validation: Economic models predict short-term gains unravelling into broader losses as retaliation intensifies
- Empirical patterns: Current tariff-induced disruptions, including elevated costs and fragmented supply chains, mirror historical protectionist episodes, notably the US-China trade war of 2018
- Strategic responses: Countries can adapt through supply chain shifts, new trade partnerships, and global cooperation
- Policy call: Swift, coordinated action is critical to mitigate risks and seize opportunities in a disrupted trade landscape.
Creating alternative supply chains
The report suggests that given US tariffs there are three key policy avenues for other countries, such as the UK to follow.
- Global Value Chain Adaptation: Disruptions to North American and Asian supply chains necessitate the reconfiguration of sourcing strategies to enhance resilience. Alternatives include Japan and South Korea, with exports rising in specific scenarios. Enhancing domestic production capacity, particularly in automotive components or electronics, provides a complementary approach, reducing dependence on tariff-affected imports. By targeting less-disrupted markets and strengthening internal capabilities, countries can mitigate exposure to volatile trade flows.
- Trade Diversification: The notable increase in US-bound exports demonstrates the potential for redirecting trade towards less-affected regions, such as ASEAN and India to offset existing losses. Actively pursuing trade agreements fast-growing economies such as India that are relatively insulated from current tariff disputes could offer significant long-term benefits. Rapid negotiation and implementation of these agreements could enhance economic stability before retaliatory escalations intensify. This strategic pivot mirrors successful diversification observed in economies like Vietnam during recent trade conflicts.
- Policy Stability and Agility: A dual-track approach to international engagement is advisable. Advocating for WTO reform to reinforce reciprocity mechanisms will help to mitigate global tariff conflicts that could otherwise escalate dramatically. Concurrently, bilateral negotiations leveraging opportunities such as increased US-bound exports could secure sector-specific advantages for pharmaceuticals and financial services. Multilateral cooperation is important and tariff strategies necessitate agile responses to market volatility, potentially through currency adjustments. By strategically balancing diplomatic engagement and pragmatic economic initiatives, some countries, such as the UK can effectively manage global disruptions while enhancing a competitive position
Conclusions
The empirical analysis of Trump’s 2025 tariffs, simulated through a structural gravity model across six escalating scenarios, highlights the risks of protectionism for global and national economies.
At the global level, unilateral tariffs and retaliatory measures trigger significant welfare losses, trade contractions, and price hikes that could lead to welfare loss of $1.4tn under the full global retaliation scenario.
These findings align with historical precedents like the Smoot-Hawley tariffs and modern trade conflicts, illustrating how protectionism erodes competitiveness, disrupts supply chains, and imposes disproportionate costs on consumers.
While the US may achieve narrow sectoral gains, broader economic inefficiencies —driven by political lobbying and terms-of-trade dynamics — ultimately diminish welfare, validating theoretical frameworks from Bagwell and Staiger (1999) and Grossman and Helpman (1994).
Crucially, the study reaffirms that no economy emerges unscathed from systemic tariff escalations, as retaliatory spirals fracture multilateral cooperation and amplify global instability.
Policymakers globally face a clear imperative: while protectionism may promise short-term political wins, its long-term costs — economic fragmentation, reduced productivity, and geopolitical instability—are untenable.
Proactive strategies leveraging trade diversification, FDI attraction, and green innovation can enhance resilience. However, enduring stability demands renewed commitment to cooperative frameworks that curb retaliatory cycles and uphold the rules-based order.
The report’s authors assert history cautions against isolationism. Instead they assert the path forward lies in reinforcing interdependence, not dismantling it.
As global tensions rise, the analysis hopes to serve as a reminder that in an interconnected world, no nation can thrive by retreating behind tariff walls.
