What would a trade war actually look like?

Donald Trump is threatening steep tariffs on all goods entering the U.S. from Canada, Mexico and China.

They'll be in place until the countries stop the flow of migrants and drugs illegally entering the U.S., Trump said. Mexico and China have threatened to respond in kind.

Businesses, economists and policymakers are trying to figure out how much of this is threat, how much is bluff and how much is real.

Trade wars are notoriously easy to start. But they can be difficult to unwind. And the consequences of this kind of global trade war could impact everyone.

"The result would be a swift and severe recession on America's northern doorstep that would crush demand for U.S. imports," wrote Derek Holt, vice-president of Scotiabank Economics.

Scotiabank ran models exploring how tariffs would weaken demand and slow economic growth. Trump has threatened a 25 per cent tariff on all goods coming into the U.S. from Mexico and Canada. 

The U.S. dollar, already surging against foreign currencies, would jump, forcing the Bank of Canada to hike interest rates, all while exporters struggle. Canadian GDP would fall by as much as 5.6 per cent.

If Canada responded with tariffs of its own, the Scotiabank model found interest rates would climb 275 basis points (or 2.75 percentage points). The loonie would fall by about 21 per cent, the unemployment rate would rise three percentage points and inflation would take off again.

Karl Schamotta, chief global strategist at the financial services firm Corpay, says Trump is threatening a level of trade barriers unseen in nearly 100 years.

"This would raise trade costs to levels last seen in the run-up to the Great Depression," wrote Schamotta in a note to clients.

Schamotta issued a chart highlighting the major changes in trade barriers going back to 1820. He measured the ratio of duties to value to see how tariffs impacted the U.S. economy.

The U.S. Smoot-Hawley Tariff Act is a widely used example of how tariffs can make things worse, Schamotta said. In that case, tariffs were aimed at protecting American farmers and preventing a recession in 1930.

They initially targeted wool and sugar, but snowballed as industries lobbied for more. Eventually, they were proposed on over 800 different products.

Other countries imposed tariffs of their own. (Canada, for example, increased tariffs on U.S. eggs by 233 per cent.) In the end, the act only worsened the effects of the Great Depression.