Trade War Scenario Threatens US Travel Sector

In recent weeks, trade policy uncertainty has taken center stage in the US economic landscape.

Amid escalating global trade tensions, new analysis from Tourism Economics, an Oxford Economics company, highlights an even greater downside risk to the US travel sector should trade disputes and other policy changes intensify. The latest findings reveal that an expanded trade war scenario could result in sharper declines in travel demand and economic output than previously projected.

In this scenario, the US implements sweeping tariffs on key trading partners, including Canada, Mexico, and China, triggering retaliatory measures that disrupt economic conditions and travel flows. Additional uncertainty stems from deteriorating travel sentiment in Europe due to tariff policies and ongoing geopolitical tensions.

The Three Channels of Impact

An intensifying trade war would negatively affect US travel through three primary channels:

1. Travel Sentiment: Strained diplomatic relations and economic uncertainty could lead to weakened travel interest from leading US inbound markets, including Canada, Mexico, and the EU.
2. Economic Pressures: A slowdown in US economic growth, coupled with recessions in Canada and Mexico should 25% tariffs go into effect, would curb travel demand.
3. Exchange Rate Shifts: A stronger US dollar, resulting from tariff-induced economic shifts, would make travel to the US more expensive for international visitors, further dampening demand.

Updated Economic and Travel Industry Projections

Under the expanded trade war scenario, GDP growth in 2025 is now projected to slow to 1.5%, down from 2.4% in the baseline scenario. Within the travel sector, the expected impact is significant:

• Total US travel spending, including both domestic and inbound travel, could be 4.1% lower than baseline expectations, representing a $72 billion reduction in total travel expenditures.
• International inbound travel to the US is projected to decline by 15.2% compared to baseline projections.
• Inbound travel spending in 2025 could fall by 12.3%, amounting to a $22 billion annual loss.

Policy Considerations and Industry Response

Historical data underscores that trade and geopolitical tensions influence travel demand. During the previous US-China trade dispute, the US share of China’s long-haul outbound travel market shrank considerably. Similarly, during past periods of strained US-Mexico relations, visitor numbers from Mexico declined by 3%.

The current analysis emphasizes the vulnerabilities faced by US trading partners. Canada’s GDP is projected to decline 2.1% from peak to trough, with unemployment surpassing 8.5% in 2025. Such economic pressures would inevitably weaken outbound travel from these markets, impacting the US travel economy.

As global trade policies remain in flux, industry stakeholders must recognize the critical link between economic policy and travel demand. Our findings warn of high-risk consequences for the US travel sector, with broad economic implications beyond tourism. Industry collaboration will be essential in mitigating negative impacts.