Towards a Trade War in 2025: Real Threats for the World Economy, False Promises for the US
Abstract
Using the MIRAGE‐Power computable general equilibrium (CGE) model, we simulate a trade war initiated in 2025 by the new US administration. The central scenario consists in a 60‐percentage point tariff increase on all US imports from China, a 10‐percentage point tariff increase on all products from other partners, except Canada and Mexico, and reciprocal tariff retaliation. World GDP and world trade decrease respectively by 0.5% and 3.4% in volume, with significant losses for the US and China, and gains for Canada and Mexico. A substantial reallocation of bilateral goods trade flows is taking place at the global level. Additional scenarios show that: details of the tariff reform matter; the discriminatory tariff treatment of China benefits other trading partners; trade retaliation increases US economic losses; if Canada and Mexico are included in the trade war, their gains turn into more significant losses than those of other countries. Last, we show that the US will not be able to replace the federal income tax with tariff revenues, even with a revenue‐maximizing tariff.