Impact of the Trade War on North America's Economy According to the OECD

The Organization for Economic Co-operation and Development (OECD) warns that the tariff restrictions imposed by President Donald Trump will negatively impact the growth of Canada, Mexico, and the United States, while also contributing to higher inflation. In its report, the OECD notes that an escalation in the trade war could further slow economic growth in these countries. For instance, it is estimated that Americans will not only face a direct cost from this situation, but that the economic slowdown could end up costing them more than what is expected to be gained from the additional tariffs.

Additionally, the OECD has forecast that global economic growth will decrease slightly from 3.2% in 2024 to 3.1% in 2025 and eventually to 3% in 2026. This adjustment in their projections comes as a downward revision from the 3.3% that had been anticipated for this year and next. However, while the global outlook shows some weakness, emerging economies like China provide a bit of stability, offsetting the challenges faced by North America. According to this organization, the rise in tariffs will lead to a decrease in global business investment, leaving central banks with few options but to keep interest rates elevated for an extended period. Starting in April, import tariffs between the United States and its neighbors are expected to increase by 25%. As a result, growth in the U.S. economy is projected to drop to 2.2% this year and may fall further to 1.6% the following year. The Mexican economy is expected to be particularly hard hit, with a projected contraction of 1.3% this year and 0.6% next year, instead of the growth figures that were previously expected. For Canada, growth is anticipated at 0.7% during the same period, significantly lower than the 2% that had been predicted. The Eurozone, while currently less affected by the trade war, will also see more modest growth of 1% this year, below earlier forecasts. On the other hand, it is expected that support from the Chinese government will boost its economy, reaching a growth rate of 4.8% in 2025. However, the OECD warns that if the United States escalates its trade war and imposes further tariffs on imports, global prospects will significantly deteriorate, impacting not only growth but also raising inflation by an average of 0.4 percentage points over the first three years. In that case, American households could face direct costs of up to $1,600.

This analysis highlights how political decisions in the realm of trade can have significant repercussions not just locally, but globally. Businesses and investors need to exercise caution and adjust their strategies amid this climate of economic uncertainty, as changes in tariff policies can drastically alter the market. Diversifying markets and seeking alternative sources of supply may be key to mitigating the risks associated with the trade war.