The global economy is bracing for a precipitous slowdown as escalating trade wars inject severe turbulence, with Canada and Mexico facing the most acute and volatile economic consequences. OECD’s latest forecast shows a dark image: US-imposed tariffs not only interrupted trade flows but also triggered retaliatory measures from large economies such as Canada, the EU, and China. The repercussions are generalized, increasing higher inflation and interest rates. While the world observes, the risk of long-term economic fragmentation appears greater than ever.
Canada’s growth forecast cut amid trade barriers
Canada could experience a significant economic slowdown, with expected growth of only 0.7% in 2025 and 2026, a sharp decline compared to the previous 2%. The 25% tariffs of the US on aluminum and steel have provided a direct blow to the Canadian industries, reducing investment and consumer spending. While Canada retaliated with its tariffs, uncertainty remains high, discouraging economic expansion.
Mexico faces a recession, as the trade war intensifies
Mexico is on the verge of a complete recession, with an expected economic contraction of 1.3% in 2025 and 0.6% in 2026. The previously expected growth of 1.6% was completely reversed due to new US tariffs on Mexican goods. As a US trade partner, Mexico is particularly vulnerable to supply chain interruptions, leading to reduced exports and reduced foreign investment.
US growth decreases as trade battles backfire
Despite beginning the trade war, the US economy is not immune to its consequences. The OECD relegated its growth projections in the US to 2.2% in 2025 and 1.6% in 2026, below 2.4% and 2.1%. While tariffs intend to protect domestic industries, they also increase costs for US consumers and companies. The main corporations, including Tesla, warned that retaliation rates from other countries could harm US exporters and reduce competitiveness in global markets.
China challenges the impact of trade war on the forecast of updated growth
Unlike US economies, China seems resilient in the face of US tariffs. The OECD has surprisingly increased China’s growth forecast to 4.8%, suggesting that Beijing’s economic policies and strategies are mitigating the effects of commercial barriers. This resilience signals a potential change in the field of global trade, with China seeking stronger ties with alternative markets.
Inflation and interest: the unintended consequences of tariff rates
Trade turmoil drives inflation higher than previously expected. Over 20 of the world’s largest economies, inflation is now estimated to reach 3.8% in 2025 and surpasses the previous estimate of 3.5%. The increase in consumer prices forces central banks to maintain higher interest rates for longer, affecting loan costs and slowing down the financial upswing.
Also Read: The U.S.-India Trade Pivot: A Grand Deal or a Tug-of-War?
Global Economic Fragmentation: A Threatening Risk
The OECD warns that ongoing trading disputes can lead to long-term economic fragmentation, where global markets are becoming increasingly divided. If protectionist policy continues, economies will shift toward regional trade blocks, reducing the overall efficiency and slowing down global trade. This shift would be harmful to economic growth worldwide, aggravating economic instability and increasing geopolitical tensions.
Conclusion: Global Trade Turbulence
The trade war initiated by the United States has sent shock waves through the global economy, with Canada and Mexico suffering from the most serious setbacks. Even the United States itself experiences slower growth, higher inflation, and warnings from large companies. While China remains relatively isolated, the broader effects of increasing trade barriers are clear. If global leaders do not find common ground, the risk of an economic decline and potential long-term fragmentation will be a hard reality.
As 2025 unfolds, the world is waiting to see if diplomacy can heal the wounds of trade conflict or whether the global economy is heading for an era of split and stagnation.
