The Director-General of the World Trade Organisation (WTO), Ngozi Okonjo-Iweala, has warned that the macroeconomic impact of the ongoing tariff tensions between the United States and China will extend beyond the world’s two largest economies, affecting others as well.
"The negative macroeconomic effects will not be confined to the United States and China but will extend to other economies, especially the least developed nations,” she said in a public statement released this week.
Okonjo-Iweala raised concern of the potential fragmentation of global trade along geopolitical lines, highlighting that a division of the global economy into two blocs could lead to a long-term reduction in global real gross domestic product (GDP) by nearly 7 per cent.
"Moreover, trade diversion remains an immediate and pressing threat, one that requires a coordinated global response,” she said, adding that "we urge all WTO members to address this challenge through cooperation and dialogue.”
The escalating trade tensions between the U.S. and China pose a significant risk of a sharp contraction in bilateral trade.
WTO preliminary projections suggest that merchandise trade between these two economies could decrease by as much as 80 per cent.
This tit-for-tat approach between the world’s two largest economies — whose bilateral trade accounts for roughly 3 per cent of global trade — carries wider implications that could severely damage the global economic outlook.
"Our assessments, informed by the latest developments, highlight the substantial risks associated with further escalation,” Okonjo-Iweala said.
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Increasing tensions
There have been signs of trade fragmentation with trade increasingly becoming re-oriented along geopolitical lines due to a rise in trade restrictions and barriers among countries.
In 2023, economists at the WTO calculated that goods trade flows between two hypothetical geopolitical blocs – based on countries’ foreign policies according to voting patterns at the UN General Assembly – have grown 4-6 per cent more slowly than trade within these blocs since Russia’s full-scale invasion of Ukraine in February 2022.
They also warned that if the world is split into two blocs, real income would decline by 5 per cent in the longer term and it will further fall by 12 per cent for the poorest countries, most of which have greatly benefited from the international trade system.
This would practically mean that vulnerable workers in export-dependent sectors would suffer the most from labour market disruptions, while low-income households which allocate a large portion of their income to tradable goods and services, would face the burden of higher prices resulting from trade barriers.
Apart from increased divergence, countries have continued to implement trade-restrictive measures. As many as 96 export-related restrictions on food, feed, and fertiliser post-Ukraine war were placed by WTO members alone and 68 are still in place covering $85 billion worth of trade.
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The latest tariff developments between the US and China risk complicating the status quo.
Just last month, WTO members raised concern over these tariff hikes and criticized President Donald Trump’s administration for undermining their commitments and disrupting the balance of concessions agreed upon by members.
Okonjo-Iweala called for the global community to work together to preserve the openness of the international trading system, emphasizing that members have agency to protect the open, rules-based trading system.
"The WTO serves as a vital platform for dialogue. Resolving these issues within a cooperative framework is essential,” she noted.