WTO Warns of Trade Fragmentation into Allied Blocs: Implications Explained

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Geopolitical tensions are reshaping trade flows as countries realign supply chains with allied partners, rather than focusing solely on the most efficient exporter. This revelation comes from the World Trade Organization, which states that while the value of traded goods and services is increasing overall, it is growing at a faster rate within blocs of allied nations. The Geneva-based organization emphasizes in its annual world trade report (available here) that this trend will lead to higher costs and increased conflict.

WTO director-general Ngozi Okonjo-Iweala raises concern over the future of an open and predictable global economy, stating, “The post-1945 international economic order was built on the idea that interdependence among nations through increased trade and economic ties would foster peace and shared prosperity.” The report, published on Tuesday, warns that this vision is now threatened.

The WTO’s analysis reveals that trade flows between two hypothetical geopolitical blocs, determined by countries’ foreign policies as reflected by their voting patterns at the UN General Assembly, have grown 4-6% slower than trade within these blocs since Russia’s invasion of Ukraine in February 2022.

In addition, there has been a rise in countries, including the US, invoking national security risks to impose trade bans on strategically important goods and services, particularly in relation to China. Examples include export controls on silicon chipmaking technology. This has led to an increase in complaints filed with the WTO, with 38 cases raised between 2017-22—twice the number compared to 2011-16.

The report also highlights an increase in barriers to goods trade, with the number of cases involving levied duties on subsidized imports doubling from 2011-16 to 164 in 2017-22.

However, the WTO emphasizes that talk of “deglobalization” is premature. The value of world merchandise trade has risen by 12% to $25.3tn in 2022, partly due to inflation resulting from the Ukraine war and rising commodity and fuel prices. Furthermore, the value of world commercial services trade reached $6.8tn in 2022, a 15% increase from the previous year.

The report also reveals that developing economies have increased their share of digital services exports by 3 percentage points in 2022, and trade in environmental goods has quadrupled since 2000, surpassing the growth of total goods over the same period.

Okonjo-Iweala believes that “re-globalization,” which involves integrating more economies and sectors into global trade flows, will contribute to reducing poverty, combating climate change through the spread of green technologies, and enhancing security by fostering close trading relationships that reduce the likelihood of conflict.

Trade ministers from WTO member states will convene in Abu Dhabi in February next year to reinvigorate the global trade body. Okonjo-Iweala adds, “The WTO is not perfect, far from it. But the case for strengthening the trading system is far stronger than the case for walking away from it.”