Global cost of 2025 tariff war could reach $1.4 trillion

An analysis by Aston University researchers is the first to estimate the economic fallout from six US trade tariff scenarios and their impact on trade flows, prices, production and welfare.

It underlines the precarity of the current moment for the UK and other world economies, and calls on swift, coordinated action from UK policymakers to mitigate risks and seize opportunities in an increasingly disrupted trade landscape.

US President Donald Trump’s tariffs in early 2025 have triggered a wave of reactions and retaliation. US imports from Mexico and Canada are subject to 25% tariffs, imported steel and aluminium tariffs are in place worldwide, tariffs on China have risen to 20%, car import tariffs are due to be imposed and countermeasures are rolling out across Europe, Asia and the Americas.

In their report, Tariffs and Triumph: The UK’s Edge in a Fractured World, Professor Jun Du and Dr Oleksandr Shepotylo, from Aston Business School’s Centre for Business Prosperity, model the potential global economic costs of US tariffs and outline a series of strategic responses for the UK.

Using core economic principles and a structured gravity approach – an economic framework that studies and quantifies the effects of various determinants of international trade – their report analyses 2023 bilateral export data and gross domestic product (GDP) for 132 countries. The report models welfare changes as measured by changes in real (net of inflation) income per capita.

Across the six potential scenarios, their key findings are:*

1. US initial tariffs: US prices rise 2.7% and real GPD per capita declines 0.9%. Welfare declines in Canada by 3.2% and Mexico by 5%.
2. Retaliation by Canada, Mexico and China: US loss deepens to 1.1%, welfare declines in Canada by 5.1% and Mexico by 7.1%.
3. US imposes 25% tariffs on EU goods: Sharp transatlantic trade contraction, EU production disruptions, US welfare declines 1.5%.
4. EU retaliates with 25% tariff on US goods: Prices rise across US and EU, mutual welfare losses and intensified negative outcomes for the US. UK experiences modest trade diversion benefits.
5. US global tariff: Severe global trade contraction and substantial price hikes substantially affect North American welfare and UK trade volumes.
6. Full global retaliation with reciprocal tariffs: Extensive global disruption and reduced trade flows, severe US welfare losses, $1.4 trillion global welfare loss projected.

For the UK, reductions in imports from the US expose critical vulnerabilities in UK supply chains, and under the worst-case scenario, UK exports to the US fall by 43.6%. Retaliatory tariff measures would also substantially reduce UK exports to other markets around the world, in particular to Mexico, and UK–EU trade would be reduced. However, in a scenario where the EU retaliates with tariffs US goods, UK exports to the US would potentially surge by 17.5%.** 

Professor Jun Du said:

“The picture for tariff measures may not be clear at the moment, but what is clear is that economies like the UK need to plan for various eventualities and start to put mitigating measures in place. US tariffs offer the UK a potential fortune through trade diversions, yet these gains could complicate efforts to reset UK–EU relations, amplifying economic divergence, political distrust and misalignment. Our report will help policymakers look at the costs and benefits of the scenarios and develop a position to move forward.”

The report underlines that the UK’s post-Brexit status provides flexibility and greater agility in a shifting trade environment. While the tariffs highlight vulnerabilities for the UK, such as dependency on the US and EU markets, they also present openings for action, such as reconfiguring supply chains to include Japan and South Korea, and enhancing domestic production capacity, for example in electronics or automotive components.

Diversifying trade towards less affected regions, such as India and Asian markets, could mitigate impacts. The UK’s capacity to negotiate trade policies independently allows it to seize opportunities that will arise from shifting global trade dynamics.

To signal a commitment to continued European cooperation, the researchers recommend UK policymakers take a pragmatic approach in response to US tariffs that balance short-term gains with long-term stability. They suggest enhancing UK–EU supply chain coordination, taking a complementary rather than competitive stance by incorporating EU input in UK global trade negotiations, and aligning on calls to reform the World Trade Organisation (WTO). They also suggest pairing US bilateral trade talks with symbolic gestures to the EU, such as reviving the youth mobility scheme.

Dr Oleksandr Shepotylo says:

“Although we predict significant costs for the UK, there are also opportunities for leaders to employ rapid measures to mitigate against the risk of a full-scale trade war and enhance the UK’s position during this challenging time. We hope that our report will be read and used by those with decision-making powers to develop a strategy to move forward in uncertain times.”

To find out more about these findings, visit the research web page.