In an era of globalization and increasingly complex supply-chain interdependencies, the resilience of national economies to external shocks has become a critical concern for policymakers worldwide. Trade tensions, geopolitical uncertainties, and unexpected disruptions, such as pandemics or logistical bottlenecks, have exposed vulnerabilities embedded within global value chains (GVCs). Understanding how economies respond to such shocks requires a detailed assessment of demand and supply elasticities, which measure the responsiveness of countries, both as consumers and producers of goods, to changes in income and prices.

This research implements the Quadratic Almost Ideal Demand System (QUAIDS) model using the Asian Development Bank (ADB) Multi-Region Input-Output (MRIO) dataset, covering 62 countries and 35 sectors. QUAIDS is a highly robust demand system that excels at evaluating non-linear and nuanced responses to shocks. By focusing on recent global trade developments, particularly the tariffs introduced by the United States in April 2025, this study showcases how different economies can potentially respond to price shocks and what this implies for global welfare, production, and trade.

Key Results

A central finding of this study is the marked increase in reliance on foreign intermediate and final demand goods over time. As countries have become more integrated into GVCs, they exhibit increased dependence on imported and often more expensive inputs, most of which are due to the lack of viable domestic alternatives. This has made countries more susceptible to external price shocks, particularly those induced by tariffs or supply chain disruptions.

The analysis also shows behavioral responses at a detailed sectoral level. Demand is generally more sensitive to income fluctuations, especially for domestically produced goods. Consumers tend to adjust their spending based on income changes, whereas their response to price changes, particularly for imported goods, is more constrained due to limited substitutability. In contrast, supply demonstrates a sharper reaction to price changes, particularly in sectors such as manufacturing, construction, and Agriculture, where producers can adjust output in response to market signals. Foreign goods exhibit weaker demand responsiveness, but are highly exposed to price volatility. This dynamic poses significant risks for economies with large import dependencies, as they face limited flexibility in adapting to increasing costs.

The study simulates the economic impact of the blanket tariffs imposed by the United States in April 2025, along with counter-tariffs from major trading partners. The global economy is projected to suffer a welfare loss of approximately 1.3% due to these trade tensions. European countries show a large variation in responses to tariffs. While Austria, Italy, France, and Germany are relatively better sheltered, other countries like Norway, Netherlands, or Denmark are much more exposed due to a higher trade dependence with the USA. Similarly, other countries with very high US trade dependence, such as Canada and Mexico, are disproportionately affected with welfare losses exceeding 5%. Smaller and developing nations, particularly in Asia, also experience notable welfare declines mostly driven by their limited ability to pivot away from expensive imports.

Interestingly, while sanctioning countries aimed to mitigate the impact through counter-tariffs, these measures can result in self-inflicted economic harm, with revenue losses that can range from 0.5% to 5% especially if the US is a major export destination depending on the country’s export exposure to the US market. The United States, by contrast, endures minimal welfare loss based on elasticity estimates due to two reasons. First, US has a relatively small share of imports in total demand. Therefore, even though import prices do increase, the change in welfare is relatively small especially if combined with rebalancing of the demand portfolio towards domestic sectors. Second, countries that do impose counter tariffs on US are also highly dependent on exports to the US. Therefore, even though the US endures a welfare loss from tariffs, it is still relatively smaller than of the countries sanctioning the US.

While the elasticities show direct response propensities to shocks, the negative impact of tariff wars can still play out indirectly through input-output linkages and demand-side income losses in the coming months.         

Implications

This research highlights several critical areas where policymakers can focus their attention to enhance economic resilience and safeguard national welfare in an increasingly volatile global trade environment.

First, countries need to prioritize diversification of both supply chains and export markets. Overreliance on specific trading partners or regions, particularly for essential intermediate goods, exposes economies to increased risks when trade tensions escalate or supply disruptions occur. Strengthening domestic production capabilities, where feasible, is essential to reduce external dependencies and ensure continuity in critical sectors.

Second, the integration of elasticity monitoring into national economic planning and risk management frameworks is vital. Regular assessments of demand and supply elasticities can function as an early warning system, providing policymakers with insights into how their economies might react to future shocks. This forward-looking approach enables the design of adaptive trade and industrial policies that can mitigate negative impacts before they propagate through the economy.

Third, caution is warranted when considering retaliatory tariffs as a policy tool. Although such measures may address immediate political or strategic concerns, they often lead to mutual economic losses without providing sustained leverage. Policymakers should carefully evaluate the long-term consequences of tariff escalations and seek alternative strategies that promote stable trade relationships and economic security.

Finally, this study underscores the importance of international cooperation and strategic trade agreements. In a fragmented global economy, collaborative efforts to stabilize trade flows and reduce protectionist pressures can help mitigate the adverse effects of tariff wars and supply chain disruptions. Policymakers should engage in strategic multilateral dialogues aimed at strengthening open, predictable, and resilient trade systems.