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 U.S. 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 U.S. administration in 2025 (the Trump administration) 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 structure, and geo-economic landscape.

The report constructs six core scenarios for simulation analysis. The central scenario (SCentral) assumes the U.S. imposes an additional 10 percentage point tariff on imports from all trading partners (except Canada and Mexico), with an extra 60 percentage point tariff on Chinese goods, while all affected trading partners implement reciprocal retaliation against the U.S. Model results show 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 of the shock would be highly concentrated in China and the United States, with both sides' GDP expected to lose 1.3%, and the U.S. Consumer Price Index rising by 1.2%. Meanwhile, trade flows would undergo a "great reconfiguration," with China-U.S. bilateral trade shrinking sharply, while Canada and Mexico would gain significant economic benefits from being exempted from U.S. tariffs.

By comparing different scenarios, the study draws several key policy insights. First, while trade retaliation measures can exacerbate U.S. GDP losses, they are not necessarily beneficial for all retaliating countries themselves; countries like China and Germany may bear additional economic costs from retaliation. Second, the U.S. discriminatory high-tariff policy against China objectively provides relative market access advantages to other trading partners, especially EU countries. Third, the positions of Canada and Mexico in this potential trade war are extremely sensitive; whether they are included in the tariff scope 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 U.S. imposes an 80% tariff rate on all imported goods—a rate that maximizes tariff revenue—the annual revenue generated would only be approximately $819 billion, far below the roughly $2.18 trillion federal income tax revenue in 2023. Moreover, this tariff rate would lead to a 2.7% decline in U.S. GDP and a 10.8% contraction in global trade, making it economically and politically unfeasible.

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