The World Trade Organization (WTO) recently released a report highlighting the impact of the trade tensions between the US and China on the global economy. The report predicts that the decoupling of the two economies could result in an 81% plunge in merchandise trade between the two countries in 2025. This figure would rise to 91% without recent exemptions granted by the US administration for products such as smartphones. As a result, there is a risk of trade diversion to Europe, with the report forecasting a 6% increase in Chinese exports to Europe.
In response to the tariffs imposed by the US on EU cars, steel, and aluminum, Europe is also expected to look for new markets for its exports. The report predicts that there will be an increase in European exports diverted to other economies, highlighting the interconnected nature of the global trade system. The tensions between China and the US have escalated, with Chinese exports facing 145% tariffs and US goods to China facing 125% tariffs. The report forecasts that Chinese merchandise exports will rise by 4% to 9% across all regions outside North America.
WTO Director-General Ngozi Okonjo-Iweala emphasized the importance of diversifying sources of supply and demand in response to the disruptions in world trade. She noted that the COVID-19 crisis has underscored the need for diversification to avoid over-dependence on specific markets. Okonjo-Iweala highlighted the risks associated with overconcentration and emphasized the need for economies to be more resilient to shocks and unfair burden-sharing. The report also predicts a decline of 0.2% in the volume of world merchandise trade in 2025, three percentage points lower than expected.
The report warns that the decoupling of the US and Chinese economies could contribute to a broader fragmentation of the global economy along geopolitical lines, creating isolated blocs with significant implications for world GDP. Okonjo-Iweala estimated that global GDP could be lowered by nearly 7% in the long term as a result of this fragmentation. The report underscores the need for countries to address trade tensions and work towards a more integrated and interconnected global trade system to avoid the negative consequences of decoupling. Lessons must be learned from the current disruptions in world trade to ensure a more balanced and resilient global economy in the future.
