The global trade war: An update

New analysis projects that US tariffs, elevated to 1930s levels as of September 2025, will result in less US economic output, higher prices, and lower wages over the coming decade. The G-Cubed model forecasts a 0.23 percentage point reduction in 2025 GDP growth and 0.62 percentage point in 2026, alongside a temporary 1 percentage point inflation surge and a permanently higher price level. Employment is expected to decline in trade-exposed sectors like durable goods manufacturing, mining, and agriculture, leading to a structural shift towards lower-wage service jobs, while also disproportionately impacting economies such as Brazil and India due to increased tariffs.

Analysis

The rolling escalation of US tariffs to levels not seen since the 1930s is projected to create a material headwind for the US economy, according to an updated G-Cubed model analysis. The tariffs in effect as of September 2025 are forecast to reduce US GDP growth by 0.23 percentage points in 2025 and a more significant 0.62 percentage points in 2026. Concurrently, inflation is expected to surge by 1 percentage point above baseline for the year starting September 11, 2025, leading to a permanently higher price level even after the Federal Reserve responds. The report highlights a significant structural shift in the labor market, with employment declining in trade-exposed sectors such as durable goods manufacturing, mining, and agriculture, while shifting toward the service sector at the cost of lower real wages for all workers. This is partially driven by a slowdown in investment as tariffs reduce the return on capital. Internationally, the impact is uneven, with economies like Brazil and India facing greater negative effects than Mexico and Canada, which benefit from USMCA exemptions. While these tariffs alone are not deemed sufficient to cause a recession, the analysis warns that their combination with other potential shocks, such as mass deportations or a loss of Fed independence, would significantly increase that risk.

Key Decisions for Investors

• Investors should consider reducing exposure to US sectors most sensitive to trade and retaliatory actions, specifically durable goods manufacturing, mining, and agriculture, which face headwinds from both lower exports and reduced domestic investment.
• The forecast for a temporary inflation spike and a permanently higher price level suggests a need to hedge portfolios against inflation, potentially by increasing allocation to inflation-protected securities and remaining cautious on long-duration fixed-income assets ahead of anticipated Federal Reserve actions.
• Re-evaluate emerging market allocations, as the analysis indicates a growing divergence in risk profiles; a more cautious stance may be warranted for economies like Brazil and India, while Mexico and Canada could offer relative resilience due to trade agreement exemptions.
• Monitor for the materialization of additional policy shocks mentioned in the report, such as changes to immigration or Federal Reserve policy, as their combination with the current tariff regime is identified as a potential trigger for a US recession.