Global trade to shrink by 0.2% as Trump tariffs trigger ‘dampening effect,' WTO warns
Global merchandise trade is projected to contract by a notable 0.2 per cent in the coming year as escalating tariffs and growing trade policy uncertainty reshape the world economy, the World Trade Organisation said in a stark reversal of earlier growth forecasts.
The WTO's latest Global Trade Outlook and Statistics report warns that the contraction could deepen to 1.5 per cent if trade tensions further escalate, representing a dramatic three-percentage-point downgrade from what would have been expected under a low-tariff scenario.
The report specifically cites the recent wave of US tariff measures under President Donald Trump's administration as the primary catalyst for the downturn, with North American trade flows projected to plummet by double digits.
'I am deeply concerned by the uncertainty surrounding trade policy, including the US-China stand-off,' WTO Director-General Ngozi Okonjo-Iweala said in the report. 'The recent de-escalation of tariff tensions has temporarily relieved some of the pressure on global trade. However, the enduring uncertainty threatens to act as a brake on global growth.'
The figures mark a significant reversal from 2024, when merchandise trade grew by 2.9 per cent, outpacing global GDP growth of 2.8 per cent – the first time since 2017, excluding the post-pandemic rebound, that trade had expanded faster than the broader economy.
North America is expected to be hardest hit, with exports projected to collapse by 12.6 per cent and imports by 9.6 per cent in 2025. This regional impact alone is sufficient to drag global trade into negative territory, the report found.
WTO Chief Economist Ralph Ossa highlighted the profound impact of trade policy uncertainty, which extends beyond the direct effects of tariffs themselves.
'Our simulations show that trade policy uncertainty has a significant dampening effect on trade flows, reducing exports and weakening economic activity,' Ossa said. 'Moreover, tariffs are a policy lever with wide-ranging, and often unintended consequences.'
Trump's tariff strategy and global response
The sharp decline in trade forecasts comes after Trump declared a 'Liberation Day' on March 31, announcing a set of reciprocal tariffs aimed at foreign goods to protect American jobs and industries. The initial proposal included a 25 per cent tariff on automobiles, 20 per cent on pharmaceuticals, and 10 per cent on all imports from most countries.
China retaliated almost immediately with a 25 per cent tariff on US goods, prompting further escalation. By April 9, Trump announced a 90-day pause on most of the reciprocal tariffs, lowering the rate to 10 per cent for most countries. However, Chinese imports still face crippling duties exceeding 125 per cent, leading to what the WTO describes as a 'decoupling between China and the United States'.
The report projects that US imports from China will fall sharply in sectors such as textiles, apparel, and electrical equipment, creating new export opportunities for other suppliers. Chinese merchandise exports are projected to rise by 4 per cent to 9 per cent across all regions outside North America as trade is redirected.
'In a world of trade tensions, a clear-eyed view of trade-offs is more important than ever,' Ossa noted in the analytical chapter of the report, where the WTO examines various scenarios for how the trade conflict might evolve.
Market observers note the recent pattern mirrors the first Trump administration's trade policies. Stocks initially fell on the tariff announcements but rebounded after the April 9 pause, with the S&P 500 gaining 1.2 per cent on April 10 as investors hoped for a more selective approach to trade barriers.
The EU has expressed serious concerns about the US measures and hinted at possible retaliatory steps, while several nations including South Korea and Brazil are in talks with the US to seek exemptions.
Trade diversion and unexpected winners
Surprisingly, the WTO found that least-developed countries (LDCs) might benefit from the trade disruption in the short term. Their exports are projected to grow by 4.8 per cent in 2025 as they capture market share from China in sectors like textiles and electronics, particularly in the US market.
'Under the current situation with the pause on US 'reciprocal' tariffs, LDCs may benefit from trade diversion as their export structure is similar to China's, especially in textiles and electronics,' the report states.
Global GDP growth is now expected to reach just 2.2 per cent in 2025, 0.6 percentage points below what would have been expected without recent policy shifts. North America faces the largest impact with growth projected to slow by 1.6 percentage points.
Services trade, though not directly subject to tariffs, is also expected to be adversely affected. The global volume of commercial services trade is now forecast to grow by 4 per cent in 2025, well below the baseline projection of 5.1 per cent. Declines in goods trade will reduce demand for transport and logistics services, while broader uncertainty will dampen travel and investment-related services.
For the first time, the WTO report includes projections for commercial services trade in volume terms, finding that most services growth in 2025 will originate from Europe, where exports are expected to grow by 5 per cent. European growth will continue at 4.4 per cent in 2026. Asian economies' services exports are projected to increase by 4.4 per cent in 2025 and by 5.1 per cent in 2026.
The report also includes a detailed analysis of trade policy uncertainty (TPU), measuring it through 'tariff water' – the gap between maximum possible tariffs under WTO rules and actual applied rates. The WTO found that about 40 per cent of the projected GDP impact stems from uncertainty rather than the tariffs themselves, as businesses delay investments and new trade relationships.
'Although the current outlook is challenging, it is worth recalling that the trajectory of world trade will not be determined by any single economy or bilateral relationship,' Ossa wrote in his analysis. 'The fact that 87 per cent of global merchandise trade takes place outside the United States – and that bilateral trade between the United States and China accounts for around 3 per cent – is a reminder of the importance of other trading relationships.'
'In the face of this crisis, WTO members have the unprecedented opportunity to inject dynamism into the organisation, foster a level-playing field, streamline decision-making, and adapt our agreements to better meet today's global realities,' Okonjo-Iweala concluded.
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