Assessing the macroeconomic impacts of the 2025 US tariffs
Summary
Focus
The study explores how the United States' tariffs in 2025 may have affected the global economy. It looks at changes in output and inflation across more than 60 economies and 16 major industries. Using a multi-country, multi-sector trade model, it traces how firms buy parts and services from each other, both at home and abroad, along global supply chains. The model also allows the labour supply to respond when prices and real wages change.
Contribution
The analysis combines global supply chains and a flexible labour market in one framework to allow for a more realistic assessment of how these trade policies affect the economy. It shows how higher tariffs raise input costs for firms, squeeze real wages and influence how much people work. It considers two time frames: in the short term, firms are tied to their current suppliers, while in the long term, they can adjust and rebuild supply chains by sourcing from new domestic or foreign partners. The study also compares the impact of a broad tariff package with a narrower policy targeting China and specific industries, offering practical insights for policymakers.
Findings
Broad tariffs lead to widespread output losses, particularly for the United States and closely linked economies like Canada and Mexico. Manufacturing is the most affected sector due to its reliance on imported parts, but services also contract, as they are interconnected with other sectors. The impact on prices varies: the United States faces notable inflation, while some trading partners experience deflation as demand for their exports falls. Over the long term, firms adapt by adjusting their sourcing, which reduces but does not eliminate their losses. Importantly, the design of the policy matters: targeted tariffs focused on specific industries and China cause less global economic disruption compared with broad-based measures.
Abstract
This paper develops a multi-country, multi-sector trade model with input-output linkages to analyze the global macroeconomic effects of the United States'(US) 2025 tariff policies. The model incorporates endogenous labor supply and captures the transmission of tariff-induced shocks through global value chains (GVCs). By simulating both short-run and long-run adjustments, the analysis demonstrates how trade shocks are amplified by sectoral interdependence and labor market dynamics. The results reveal substantial short-run output losses and inflationary pressures, especially for economies deeply integrated into US supply chains, while long-run reallocations partially mitigate-but do not fully offset-these impacts.
JEL classification: F13, F41, E31, C68
Keywords: tariffs, global supply chains, inflation, output, trade war
