A few weeks on from Washington’s first wave of tariff announcements, international trade data points to a subdued outlook, with key indicators signalling serious risk of trade diversion to Europe as a result of the disruption in trade between US and China, according to the World Trade Organization (WTO).
The WTO’s “Global trade outlook” released on Wednesday found decoupling Chinese and US economies would lead to an 81% plunge of merchandise trade between both countries in 2025 and 91% without the recent exemptions granted by the US administration for products such as smartphones.
As a consequence, the report foresees an increase of 6% of Chinese exports to Europe. But Europe, hit too by US tariffs, will also look for other markets for its exports, the WTO says.
“This is a two-way street, there will also be some European exports diverted to other economies,” WTO Chief Economist Ralph Ossa claimed, adding: “Think about the high tariffs that are in place on motor vehicles for example. This is a way through which these tensions could potentially propagate.”
The US has imposed 25% tariffs on EU cars, steel and aluminium. US tariffs of 10% apply also to other EU exports.
The tensions between China and the US has been escalating with Chinese exports to the US being hit with 145% tariffs and US goods to China facing 125% tariffs.
More generally, Chinese merchandise exports are projected to rise by 4% to 9% across all regions outside North America, according to the report’s forecasts.
Lessons will have to be learned, WTO Director-General Ngozi Okonjo-Iweala said about the world trade disruptions as she announced a decline by 0.2% of the volume of world merchandise trade in 2025, which amounts to nearly three percentage points lower than expected.
“One of the clearest lessons of the COVID-19 crisis is the importance of diversifying sources of supply. Today’s trade tensions remind us that we must also diversify demand,” she said, adding: “Overconcentration, whether it is where we buy from, or where we sell to, leads to over dependence, making economies more vulnerable to shocks and fostering a sense of unfair burden-sharing.”
The report said that the decoupling between US and Chinese economies will contribute to a broad fragmentation of the global economy along geopolitical lines in two isolated blocs.
It will also have an impact on the world GDP. “Our estimate is that global world GDP would be lowered by nearly 7% in the long term,” Okonjo-Iweala said.
