Tariff-induced trade disruptions in energy and non-energy sectors: Long-Term implications for emissions, energy demand and resource efficiency

Abstract

The imposition of import tariffs by the United States on goods imported from Mexico, Canada, and China, as well as the corresponding retaliatory measures by these countries, can have multiple economic and non-economic impacts on these countries. Given that the United States is one of the world's largest economies, this trade war could have a significant impact on countries around the globe, albeit with varying degrees of effect on each. This study examines the environmental and energy sector impacts of recent U.S. tariff measures and retaliatory responses by Canada, Mexico, and China using a dynamic multi-regional general equilibrium model. Two scenarios are analyzed: (1) unilateral U.S. tariffs-25% on non-energy goods and 10% on energy goods from Canada and Mexico, plus 10% on Chinese goods; and (2) these tariffs met with retaliatory measures from Canada, China, and Mexico, projecting effects to 2050. Under the first scenario, the results indicate that U.S. tariffs on agricultural and industrial goods reduce US GDP by 0.2% in 2040 while Canada's GDP by nearly 2% by 2040, with losses exceeding 2.5% by 2050 when tariffs imposed on petroleum products and energy carriers imported from Canada. on the other hand, Mexico GDP decrease by 10% in long run and China show small decrease on GDP. However, energy demand decreases with economic activity, and carbon emissions decrease as a decrease of fossil fuel consumption. These reductions are mitigated by higher output and energy demand in the Rest of the World, implying potential carbon leakage. Under retaliation measures, Retaliatory tariffs exacerbate GDP losses of 5% by 2040 in Canada, US by 0.3%; Mexico up to 15% by 2050 and China's GDP decrease 1% in long run. Moreover, under retaliation exacerbate Canada energy demand loss up to 7% by 20240 while carbon emission decreases up to 4% in Canada and 0.2% globally by 2050. The results demonstrate that while protectionist trade policies may reduce emissions locally, they can undermine global environmental sustainability by merely shifting emissions elsewhere, emphasizing the need for coordinated, climate-aligned trade frameworks.