Escalating Tariff Tensions Could Drag Down Global GDP and Fuel Inflation, Economists Say
Kate Nishimura
5 min read
Roiling trade tensions stand to raise inflation and stymie global economic growth in 2025, according to research from the Organization for Economic Cooperation and Development (OECD) released Monday.
The quarterly report, developed by international economists, paints a picture of “softening global growth prospects” amid flagging consumer sentiment, uncertain trade policies and lingering inflationary pressures being felt across the world. These adverse effects are projected to persist through 2026.
Global gross domestic product (GDP) growth could slide from 3.2 percent in 2024 to 3.1 percent in 2025 and 3 percent in 2026 if trade barriers in a number of G20 countries are indeed erected and geopolitical pressures remain at play. In the U.S., annual GDP growth is projected to lose strength, falling to 2.2 percent in 2025 and 1.6 percent in 2026.
While inflation is “still moderating” amid soft economic growth, it will remain higher than originally anticipated. “Core inflation is now projected to remain above central bank targets in many countries in 2026, including the United States,” OECD analysts wrote.
The group’s projections assume that President Donald Trump’s 25-percent duties on goods made in Mexico and Canada will be implemented on April 2. Inflation would be lower and economic activity would be more robust if all three countries would lower duties and countermeasures—or confine the tariffs to a smaller list of products—but even if those things happened, growth would still be “weaker than previously expected.”
“Significant risks remain,” the economists wrote. “Further fragmentation of the global economy is a key concern.”
Trump has tapped Commerce Secretary Howard Lutnick for the task of reviewing the country’s global trade policies and their implications for the U.S. by early April, after which point the administration will decide whether and how to proceed with retaliatory duties against trade partners that have a trade surplus with the U.S.
“If the announced trade policy actions persist, as assumed in the projections, the new bilateral tariff rates will raise revenues for the governments imposing them but will be a drag on global activity, incomes and regular tax revenues,” OECD pointed out. “They also add to trade costs, raising the price of covered imported final goods for consumers and intermediate inputs for businesses.”
Manufacturers in New York and New Jersey last week told Sourcing Journal that they have already experienced price increases on inputs sourced from countries being targeted by tariffs. Buttons from China and fabrics from Italy were among the materials and components already seeing 5 percent to 15 percent price hikes—even though tariffs on European products have not yet taken effect.
“The impact of higher costs will be amplified where inputs cross borders several times and duties are incurred at each stage, as is the case in the integrated North American market,” the white paper stated. For example, cotton fabrics milled in the Carolinas and shipped to Mexico to be cut and sewn could incur duties on their way out of the country—and on their way back into the U.S. as finished garments.
While tariffs currently only apply to goods not covered by the United States-Mexico-Canada Agreement (USMCA), the 25-percent duties are set to apply to all imports from both countries should they go into effect early next month. Canada has already raised duties on $60 billion in U.S.-made products, from whiskey to computers, servers and sporting equipment, and has threatened to add another $100 billion in retaliatory duties should Trump’s reciprocal tariffs take effect.
Mexican President Claudia Sheinbaum has tried to play ball with Trump, and has declined to lay out the specifics of a retaliatory trade action should the American leader move forward with his plan—though she has said Mexico will protect its interests.
“Such tariffs are likely to be particularly costly for Canada and Mexico due to their greater openness to trade, and high proportion of trade with the United States,” the economists said. “An agreement that would ease trade tensions, and potentially even lower existing trade barriers, would be welcome and help to improve policy certainty and growth prospects.”
Moreover, international governments must find avenues to address concerns within the global trading system, in order to “avoid a significant ratcheting up of retaliatory trade barriers between countries”—a situation that “would have significant negative impacts on living standards” for citizens across the world.
“Efforts to avoid further trade fragmentation should be coupled with reforms that strengthen the resilience of supply chains, including by encouraging firms to diversify both suppliers and buyers,” the economists recommended. That diversification would be bolstered by shared regulatory standards on production inputs, for example, allowing those intermediate parts and pieces to be traded without restriction.
“Countries should also not lose sight of the opportunities for potential benefits from collectively agreeing to lower the current tariff and non-tariff barriers on goods and services,” the analysts wrote. They proposed an illustrative scenario in which all countries lower their average effective tariff rates by 1.5 percentage points (relative to the baseline projections). If that were to take place, global output would grow by 0.3 percent by the third year, and inflation would soften by close to .25 percent points on average in the first three years, they estimated.
Should the tariffs persist, though, consumers will bear much of the burden. U.S. household real incomes are projected to decrease by 1.25 percent—about $1,600—within three years.
