Global trade weathers Iran, Ukraine and Trump's tariffs

From COVID to Donald Trump's tariffs — with wars in Ukraine and the Middle East in between — world trade policy is enduring the most unpredictable period of the postwar era.

The pandemic shut factories worldwide and accelerated a shift away from China, the world’s largest manufacturer. The two conflicts then disrupted global supplies of oil and gas, food and fertilizer.

US President Donald Trump’s tariffs, meanwhile, pushed US duties to their highest level in decades, forcing firms to find new suppliers and markets.

Robert Staiger, chief economist at the World Trade Organization (WTO), calls the turmoil "the most serious and sustained disruptions since the [world trading] system was created 80 years ago."

Goods trade buoyed by AI demand

Despite these shocks, global trade has remained surprisingly resilient.

According to the WTO's annual report published last week, goods trade volumes rose 4.6% last year, lifted by strong demand for the advanced technology behind the artificial intelligence (AI) build-out. Services trade volumes grew by 5.3%.

China remained the world's largest goods exporter, while the United States was again the largest importer. The European Union came in second in both.

However, Staiger told AFP news agency last week that strong AI exports "may be masking some of the drop in world trade that might otherwise be occurring." 

The WTO noted in its March trade outlook that Asian countries dominated the AI goods trade, while Africa, Latin America, the Middle East and much of Europe barely showed up.

AI-related tech accounted for about one-sixth of goods trade but close to half of global trade growth.

Washington sidesteps WTO rules

Since returning to office last year, Trump has continued to pivot from WTO rules on global trade.

The US president has set country-specific duties, breaking the WTO’s equal-treatment rule. He has since negotiated exemptions and "reciprocal" tariffs with individual countries.

Despite this, globally, about 72% of goods are still traded on the Geneva-based agency's core terms, down from roughly 80% in 2022.

On a longer horizon, though, globalization appears to have stalled. WTO data shows that since about 2015, world trade has grown only as fast as the global economy. Despite the recent geopolitical upheavals, globalization has yet to shift into reverse.

Policymakers and economists say it is too soon to know whether the wars, alongside a pivot toward protectionism in the US, China, the EU and post-Brexit Britain, mark the end of an ever-interconnected world.

"The world is certainly not becoming more globalized," Thomas Sampson, an associate professor at the London School of Economics, told DW. "But it's still an open question whether we're actually at deglobalization or just shifting around who we trade with."

How global trade is changing

Since Russia's full-scale invasion of Ukraine in February 2022, the EU has sharply cut its reliance on Russian pipeline gas from 37% in late 2021 to around 10%, according to Eurostat, the bloc's statistics agency. EU oil and coal imports from Russia are now negligible.

These moves spurred new energy deals with the US, Norway, Australia and Kazakhstan, with liquefied natural gas (LNG) replacing Russian pipeline gas.

Moscow did find new energy buyers — notably China and India — which took Russian oil at a large discount to global benchmark prices.

How India has become Russia's trade lifeline

Camille Reverdy, an affiliate fellow at the Brussels-based think tank Bruegel, doubts whether the EU will rekindle its energy trade with Moscow when the war ends.

"If the alternatives become reliable sources, I don't see it coming back," Reverdy told DW.

When the Iran war began in late February, Tehran effectively shut the Strait of Hormuz, one of the world's most critical energy transit chokepoints. Saudi Arabia and the United Arab Emirates sent some of the missing oil by pipeline to alternative ports.

According to the International Energy Agency, the world also replaced the missing millions of barrels with increased production from the US, Kazakhstan, Brazil and Venezuela. Several nations have also tapped about 300 million barrels from their strategic oil reserves, Reuters reported in August.

Almost seven months into the conflict, energy prices remain elevated, with Brent crude trading above $100 for much of the war. Several analysts are now warning of dangerously tight supply in the fall and winter.

The squeeze from Trump's tariffs is also weighing on trade. 

US imports from China, for instance, fell by around 28% last year, according to the Washington-based Peterson Institute for International Economics. At the same time, its imports from the rest of the world climbed by nearly a tenth — much of it from Vietnam, Taiwan and Mexico, as part of rerouting efforts to cut reliance on Chinese suppliers.

Will Trump's strategy outlast him?

Trump’s attacks on the WTO have raised a sharper question. If the Geneva-based body were shelved, what would replace it? Experts have floated several alternatives.

These include continuing Trump's country-by-country tariffs or a web of free trade deals between economic blocs, including BRICS nations of the Global South.

The third, mooted by think tanks like Chatham House, would see the EU, Japan, Canada, Australia and Mexico keep trading by WTO-style rules at a scale the US and China could not ignore.

Bruegel's Reverdy thinks the EU would prefer a reformed WTO to the alternatives.

"The EU still wants to be seen as the leader of free and multilateral trade," she told DW, noting how Brussels has added new layers of trade policy, including possibly making Canada an associate member.

Canada and Europe: an alliance against Trump?

LSE's Sampson warned that continuing with Trump's "law of the jungle" would disadvantage smaller countries, who he said have a "bigger voice" under the current WTO system.

Noting how "trust in the US as a trading partner has collapsed," Sampson told DW it could take many years for confidence to return, even with a Democratic president.

WTO economists, meanwhile, have modeled different futures, noting how further trade fragmentation along geopolitical lines could cut global GDP by about 5% by 2050.

In a world in which the WTO vanished and only a patchwork of free-trade deals remained, GDP could fall closer to 7%, with the smallest and poorest economies hit hardest.

Reinforcing multilateral rules, however, could raise global GDP by roughly 3%, the agency said.