On Wednesday, the World Trade Organization (WTO) drastically revised its global trade outlook, moving from previously anticipated solid growth to a projected decline. This adjustment stems from potential fallout related to ongoing U.S. tariffs and their broader implications, which could cause the most severe downturn since the peak of the COVID-19 pandemic.
The WTO now predicts a 0.2% contraction in merchandise trade for the year, a significant downgrade from its October forecast of a 3.0% increase. This updated outlook accounts for existing trade measures as of early this week.
The trade tensions primarily involve the U.S. imposing additional duties on steel, car imports, and more expansive global tariffs, which were elevated before a temporary pause on increased duties for several countries. The escalating trade conflict between the U.S. and China, characterized by retaliatory tariffs, has pushed duties on each other’s products to exceed 100%.
According to the WTO, if the U.S. reinstates full tariff rates, goods trade growth could be reduced by 0.6 percentage points, with an additional 0.8 point cut owing to broader spillover effects. Collectively, these factors could lead to a 1.5% trade decline, marking the largest drop since 2020.
WTO Director General Ngozi Okonjo-Iweala highlighted concerns that a shrinking global merchandise trade might negatively affect overall GDP growth, as trade tensions can adversely impact financial markets and various economic sectors. She also expressed particular worry about the repercussions for developing nations and the risk of decoupling between the Chinese and U.S. economies.
The WTO anticipates an 81% decrease in trade between the two countries, a figure potentially reaching 91% if not for recent exemptions on items like smartphones. Such decoupling could lead to a fragmented global economy divided along geopolitical lines, resulting in isolated economic blocks, which could shrink global GDP by 7% over the long term.
Due to the extraordinary nature of recent changes in trade policy, the WTO advises that current predictions should be viewed with increased caution. Meanwhile, the organization is also projecting a gradual recovery of 2.5% in global trade by 2026.
