A full-scale trade war escalating into a new Great Depression is a worst-case scenario, but it is not impossible. History offers a precedent: the Great Depression of the 1930s was exacerbated by the Smoot-Hawley Tariff Act of 1930, which imposed high tariffs on imports, leading to retaliatory measures from other countries. This caused a collapse in global trade, deepening the economic downturn.

Could a Trade War Trigger Another Great Depression?

1. Severe Economic Slowdown – If tariffs significantly restrict trade, global GDP growth could plummet, leading to job losses, reduced corporate profits, and weaker consumer spending. A global recession could turn into a depression if businesses fail in large numbers and unemployment soars.

2. Retaliation and Market Panic – As seen in the recent April 2025 market decline, retaliatory tariffs by Canada, Mexico, and China increase uncertainty, discouraging investment. If this cycle continues, stock markets could collapse further, damaging financial stability  .

3. Rising Inflation and Cost of Living – Tariffs increase import costs, leading to inflation. If wages don’t keep up, consumer purchasing power declines, worsening economic conditions.

4. Debt and Banking Crisis – High inflation, combined with an economic downturn, could push companies and consumers into default on loans, leading to banking failures and a potential financial system collapse, similar to what happened in the 1930s.

5. Global Economic Fragmentation – Countries may abandon free trade agreements, creating isolated economic blocs. This could weaken global cooperation and innovation, stalling technological and industrial progress.

Can It Be Avoided?

Governments have more tools today than in the 1930s, including monetary policy adjustments by central banks and fiscal stimulus packages. However, if trade tensions remain unresolved, the risk of a prolonged economic downturn increases.

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