The 2025 trade war: Dynamic impacts across US States and the global economy

Andres Rodriguez-Clare, Mauricio Ulate and Jose P Vasquez

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: We use a dynamic trade and reallocation model with downward nominal wage rigidities to quantitatively assess the economic consequences of the recent increase in the U.S. tariffs on imports from Mexico, Canada, and China, as well as the "reciprocal" tariff changes announced on "Liberation Day" and retaliatory measures by other countries. Higher tariffs trigger an expansion in U.S. manufacturing employment, but this comes at the expense of declines in service and agricultural employment, with overall employment declining as lower real wages reduce labor-force participation. For the United States as a whole, real income falls around 1% by 2028, the last year we assume the high tariffs are in effect. Importantly, our analysis disaggregates the U.S. into its 50 states, while incorporating cross-state redistribution of the tariff-generated fiscal revenue, allowing us to analyze which states gain or lose more from the shock. Around half of the states lose, with some states experiencing real income declines of more than 3%. Turning to cross-country results, some close U.S. trading partners - like Canada, Mexico, China, and Ireland - suffer the largest real income losses.

Keywords: tariff changes; U.S. tariffs; liberation day; Canada; Mexico; China (search for similar items in EconPapers)
Date: 2025-05-08
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