The 2025 Trade War: Dynamic Impacts Across U.S. States and the Global Economy

We use a dynamic trade and reallocation model with downward nominal wage rigidities to quantitatively assess the economic consequences of recent U.S. tariff increases on imports from Mexico, Canada, and China, as well as the “reciprocal” tariff changes announced on “Liberation Day” and retaliatory measures by other countries. Higher tariffs lead to a rise in U.S. manufacturing employment, but this comes at the cost of declines in service and agricultural jobs. Overall employment falls, as lower real wages reduce labor-force participation. Real income in the U.S. declines by about 1% by 2028, the final year we assume the tariffs remain in effect. A key feature of our analysis is the disaggregation of the U.S. into its 50 states, incorporating cross-state redistribution of tariff revenue. This allows us to identify which states gain or lose more from the policy shock. Around half of the states experience real income losses, with some seeing declines greater than 3%. At the international level, close U.S. trading partners—including Canada, Mexico, China, and Ireland—suffer the largest real income losses.