Recent tariff measures by the US and countermeasures by its trading partners have dominated global policy debates. Using three economic models, this column shows how the tariffs impact trade flows, output, and welfare, especially in North America and China. In the short term, tariffs act as negative supply shocks for tariffing countries (depressing output while raising consumer prices) and negative demand shocks for targeted countries (depressing both output and prices). In the long term, output losses could reach 1% of global GDP, underscoring the need for renewed cooperation on trade policy.
A recent series of tariff measures by the US and countermeasures by its trading partners have significantly raised the level of uncertainty surrounding the global economic outlook (Evenett and Fritz 2025). The IMF revised its global GDP growth forecasts in its April 2025 World Economic Outlook (WEO) to 2.8% for 2025, down from 3.3% in the January 2025 WEO update. Global trade growth is projected to more than halve – from 3.8% last year to 1.7% this year (IMF 2025). Other studies have looked at how the tariffs could impact trade flows (WTO 2025), trade deficits (Obstfeld 2025), and jobs in depressed areas (Dorn 2025). Drawing on work for the IMF’s WEO, we evaluate the macroeconomic implications of recent tariff actions.
Our approach is to assess the different channels through which tariffs operate by looking at three models: the IMF’s Global Integrated Monetary and Fiscal (GIMF) model and two trade models based on Caliendo and Parro (2015, hereafter referred to as CP) and Caliendo et al. (2023, hereafter CFRT). The GIMF model is a global dynamic model featuring capital accumulation, numerous rigidities, three sectors, and global value chains. CP and CFRT are static models with rich country and sectoral structures as well as detailed input-output linkages. CP assumes constant returns to scale, whereas CFRT features heterogeneous firms with increasing returns to scale determining whether to produce and export.
These models complement each other and allow us to infer different short- and long-term implications of tariffs on the global economy and individual countries.
The escalation of trade measures
The simulations focus on tariff measures announced between 1 February and 4 April 2025. These measures increase the effective overall tariff rate in the US by about 25 percentage points, with the largest increases affecting China (over 50 percentage points) and somewhat smaller increases for Canada, the euro area, and Mexico (around 15 percentage points) – see Figure 1. Countermeasures by US trading partners add an effective tariff rate increase of about 5 percentage points on total US goods exports. Additional tariff measures announced after 4 April are not included in this assessment.
Figure 1 Increase in US effective tariff rates by region (in percent)
Source: USITC, ITC macmap, US executive orders, IMF staff calculations.
Note: Graph shows import-weighted average tariffs (using 2023 trade flows). January 2025 uses applied tariff rates before 20 January 2025. March 2025 adds US tariffs announced between 20 January and 1 April 2025. Apr 2 to Apr 4 adds tariffs announced on 2 April 2025 and up to 4 April 2025. It is further assumed that the rules-of-origin provision for the US tariffs under USMCA implies an increase in effective rates equal to half the increase in headline rates.
Short-term economic effects
The IMF’s GIMF model captures an important channel for the transmission of higher tariffs by jointly modelling the response of investment, consumption and exchange rates, and the role of nominal and real rigidities. Simulations show that the impact on global activity is negative, as the tariffs work as an adverse supply shock for the imposing economies and a negative demand shock for the economies facing them. Canada and Mexico, China, and the US are the most affected countries, as they are the most exposed to the policy change (Figure 2).
Our simulations for the WEO also show that the higher tariffs lead to currency depreciation relative to the US dollar, though the magnitude depends on whether tariffs are perceived to be permanent or temporary (IMF 2025). The impact on inflation is uncertain and varies across regions: while China experiences a decrease in inflation, the impact on US inflation depends on the extent of dollar appreciation and whether import costs are fully passed on to consumers.
Figure 2 Short-run effects of tariffs on GDP
(percent deviation from a forecast with no tariffs)
Source: IMF staff estimates.
Note: Figure shows results from tariff simulations using the IMF’s Global Integrated Monetary and Fiscal (GIMF) model for the first three years by country. Other Asia includes BGD, BRN, IDN, IND, KHM, LAO, MMR, MYS, PHL, SGP, THA, and VNM.
Medium- to long-term economic effects
All three models (GIMF, CP, and CFRT) are used to assess medium- to long-term impacts (ten years), under the assumption that tariffs are permanent.
In the long term, tariffs reduce global trade and reallocate flows across countries. Canada and Mexico, China, and especially the US see the largest declines in exports. The models indicate that tariffs generate long-term output losses across all models, with this same set of countries most affected. The global output is impacted negatively between 0.4 and 1% of world GDP.
Table 1 Long-run effects of tariffs
(percent deviation from a forecast with no tariffs)
Losses come from three channels. The CP model emphasises losses due to inefficient resource allocation across sectors, while CFRT shows larger losses from reduced market access for productive firms. GIMF emphasises lower capital accumulation from tariff-related distortions. The findings indicate that these losses outweigh any terms-of-trade gains from unilateral tariffs. Results depend on trade and macro elasticities, which are greater in the trade models than in GIMF. The combined effects from lower capital accumulation and sectoral misallocation, as well as prolonged trade policy uncertainty (not included in the simulations), would compound the losses for each region (Baqaee and Malmberg 2025).
Conclusion
While the tariff constellation may change over time, the simulations indicate that the macroeconomic effects of tariffs can be substantial and are largely negative – impacting global trade, output, and welfare. These effects can vary significantly across countries and regions, depending on factors such as the size and structure of their economies, the nature of their trade relationships, and their policy responses.
While significant, this assessment should be considered a lower bound. Further escalation of trade measures beyond those covered here, prolonged uncertainty about future tariffs, and the tightening of global financial conditions would further amplify the negative short and long-term effects documented in this analysis. Enduring trade tensions might also trigger a reversal of global economic integration – leading to suboptimal relocation of production units, technological decoupling, financial stability risks, and the inefficient provision of global public goods – with negative growth and welfare effects in the longer term (Aiyar at al. 2023).
Overall, our analysis highlights the urgent need for countries to resolve trade tensions and promote clear and transparent trade policies to stabilise expectations, avoid investment distortions, and reduce volatility while avoiding steps that could further harm the world economy.
Source : VOXeu
