No One Wins in a Trade War

The OECD published its latest economic outlook on Monday, downgrading its global growth projections for 2025 and 2026 in light of various political and economic uncertainties. Compared to its last outlook, published in December 2024, the OECD revised its global GDP growth projection for 2025 from 3.3 percent to 3.1 percent and its 2026 estimate from 3.3 percent to 3.0 percent.

Aside from lingering inflation, the OECD attributes its downward revision to higher trade barriers and to increased political uncertainty weighing on investments and private consumption. Perhaps the biggest downside risk to global growth projections, the report finds, is a further escalation of trade restrictions in the form of tariffs, which could have a significant negative effect on economic growth, both globally and, to varying degrees, at the national level.

The OECD estimates that a 10-percent increase in tariffs on all non-commodity imports to the United States met with a similar increase in tariffs on imports from the U.S. could result in a 0.3 percent decline of global GDP by the third year compared to the baseline scenario. The United States, as well as its North American trade partners Canada and Mexico, would be disproportionately affected by a possible trade war, the OECD finds, with estimated GDP differences of -0.7, -0.6 and -1.3 percent compared to the baseline scenario, respectively.

Additionally, the OECD predicts a significant effect of additional tariffs on inflation, projecting that the aforementioned 10-percent increase in tariffs would drive up global inflation by 0.4 percentage points per year over the first three years and by 0.7 percentage points per year in the United States. In short, there are no winners in a trade war and the country currently propagating tariffs, the United States, is set to be among the biggest losers of a further escalation of trade tensions.