The World Trade Organization (WTO) has made a grim prediction. They are rightly worried about the future of global trade as tensions between the U.S. and China continue to rise. WTO Director-General Ngozi Okonjo-Iweala expressed concern regarding the “decoupling” of the two economic giants, calling it “a phenomenon that is really worrying to me.” This seemingly innocuous statement underscores the dramatic and widening rifts that threaten to remap the global trade landscape.
Yesterday, the United Nations Conference on Trade and Development (UNCTAD) released such a report. It predicts that global growth will be halved to 2.3% by 2025, largely due to persistent trade tensions and uncertainty. Ralph Ossa, the Chief Economist of UNCTAD, elaborated on the situation, noting, “Tariffs are a policy lever with wide-ranging, and often unintended consequences.” This piece of wisdom is a reminder of the complicated relationship between trade policies and our overall prosperity.
The WTO’s current outlook paints a worrisome picture, with a projected drop in global trade this year. This recent downturn is largely due to tariffs enacted by U.S. President Donald Trump. Specifically, it is projecting an overall 11% decline in North America. This comes on the heels of an April 5 roll-out of a baseline tariff of 10% on almost all foreign imports. This has led to an effective tariff increase on all Chinese goods by 145%.
Despite such bleak predictions, the WTO has recognized that some areas could continue to see trade growth. Asia and Europe are both expected to see only modest increases in exports and imports this year. “The collective contribution to world trade growth of other regions would remain positive,” the WTO report stated, providing a glimmer of hope in an otherwise bleak outlook.
A notable first in the report this year is the introduction of a five-year forecast for services trade. This move is an admission of reality in international trade — we are at a point where countries are trading services, not just goods.
These joint developments had a tremendous effect on financial markets. The U.S. stock market opened sharply lower Wednesday. Major indices joined in the declines as uncertainty continued to weigh on trade policies.
UNCTAD’s report provides additional evidence that trade policy uncertainty has a major negative impact on trade flows and cross-border economic activity. Ossa remarked, “Our simulations show that trade policy uncertainty has a significant dampening effect on trade flows, reducing exports and weakening economic activity.”