The real threat of the trade war to the world

Key Chapter Title List

1. Introduction
2. Literature Review
3. Methodology
4. Economic and Trade Impacts of the Central Scenario
5. Five Key Policy Conclusions
6. Can the US Replace Federal Income Tax with Tariff Revenue?
7. Concluding Remarks
8. Appendix

Document Introduction

This study, released in 2025 by the French Center for International Economic Research and Information (CEPII), aims to conduct a cutting-edge, quantitative ex-ante assessment of a potential global trade war that could be triggered if the new US administration (Trump administration) in 2025 implements the radical protectionist policies proposed during its campaign. The core of the report utilizes the dynamic computable general equilibrium model MIRAGE-Power to simulate trade shocks centered on significant tariff hikes and the retaliatory actions they provoke from partner countries, systematically analyzing their profound impacts on the global and major national economies, trade, industrial structures, and geo-economic landscape.

The report constructs six core scenarios for simulation analysis. The central scenario (SCentral) assumes the US imposes an additional 10 percentage point tariff on imports from all trading partners (except Canada and Mexico), with an extra 60 percentage points on Chinese goods, while all affected trading partners implement reciprocal retaliation against the US. Model results indicate that this potential trade war would lead to a 0.5% contraction in global GDP and a 3.4% decline in global trade volume by 2030. The core impact would be highly concentrated on China and the US, with both sides' GDP expected to suffer a 1.3% loss, and the US Consumer Price Index projected to rise by 1.2%. Concurrently, trade flows would undergo major restructuring: bilateral trade between China and the US would shrink sharply, while Canada and Mexico would gain significant economic benefits due to their exemption from US tariffs.

By comparing different scenarios, the study derives several key policy insights. First, while retaliatory trade measures can exacerbate US GDP losses, they are not necessarily beneficial for all retaliating countries themselves; nations like China and Germany may bear additional economic costs from retaliation. Second, the US's discriminatory high-tariff policy against China objectively provides relative market access advantages to other trading partners, particularly EU countries. Third, the positions of Canada and Mexico in this potential trade war are extremely sensitive; inclusion or exclusion from the tariff measures would lead to vastly different economic outcomes for them. Fourth, if the trade war escalates further to include non-tariff barriers, the global economic consequences would be more severe.

The report also specifically assesses the feasibility of Trump's proposal to replace federal income tax with tariffs. Simulation calculations show that even if the US imposed an 80% tariff rate on all imports—a rate that would maximize tariff revenue—the annual revenue generated would only be approximately $819 billion. This is far below the roughly $2.18 trillion in federal income tax revenue collected in 2023. Moreover, such a tariff rate would cause a 2.7% decline in US GDP and a 10.8% contraction in global trade, rendering it economically and politically unfeasible.

This study not only provides detailed quantitative analysis but also delves into the potential global value chain reorganization, new trade deficit pressures (particularly the possible widening of various countries' deficits with China), and the further strain on the already fragile multilateral trading system centered on the World Trade Organization that a trade war could trigger. The report concludes by discussing possible strategic response options for US partners, including negotiating for exemptions or preparing credible retaliation, and notes that major powers (such as China and the EU) possess significant advantages in terms of retaliatory capacity and diversity of measures. This assessment, based on a rigorous model, provides crucial decision-making references and an analytical framework for policymakers, corporate strategists, and international relations scholars to understand potential future geo-economic risks.