Global Trading System Facing Fragmentation or Revamp at 'Critical Juncture,' WTO Says

By Paul Hannon

The splintering of the world trade system into a small number of geopolitical blocs or a larger number of regional groupings would lead to a significant reduction in economic activity by the middle of this century, the World Trade Organization said Tuesday.

The U.S. last year sharply raised tariffs on imports from around the world, and has continued to impose new duties on some countries. However, those moves have yet to provoke widespread retaliation, nor have other countries yet raised their tariffs on non-U.S. imports.

In an annual report, the Geneva-based dispute resolution body estimates that 72% of world trade in goods is still taking place on terms compatible with its non-discriminatory rules, down from 80%. Despite the higher tariffs and heightened uncertainty about policy, trade flows grew rapidly in 2025 and the first half of this year, boosted by the AI investment boom.

However, economists at the WTO don't believe the status quo can be sustained, and instead called for a concerted effort to repair and refresh the multilateral trade system.

"There are underlying tensions that do need to be addressed, and if left unaddressed, will continue to roil the world trading system," said Robert Staiger, the WTO's chief economist. "Most members agree that the status quo is not really an option. So either successful reform will occur or the status quo will not be the outcome."

The WTO examined two ways in which the trading system might fragment. In one scenario, many countries would trade relatively freely within geopolitical blocs likely centered on the U.S. and China, but commerce between those blocs would be limited. The trade body's economists estimate that would lower global exports by 18.6% and economic output 5.1% in 2050.

An alternative path would see flows of exports and imports centered on free trade agreements, which have proliferated in recent years. In that scenario, exports would be 26.9% lower and gross domestic product down 6.9%, with the poorest countries suffering the largest losses.

By contrast, the WTO said a reshaped system of "enhanced cooperation" in which most goods were traded among an expanded number of countries at lower tariffs would raise world exports by 17.9% and GDP by 2.9% in 2050.

"The cost of inaction on reform would be up to 10% of global GDP," said Staiger. "The world trading system really is at a critical juncture."

The WTO's economists have identified a number of reasons for the tensions that now surround world trade. For one, the period of freer trade that accompanied the creation of the WTO in 1995 has profoundly changed the world economy, and in particular raised the relative importance of China and other developing economies.

Deals that seemed to make sense for all parties then have aged badly for richer economies such as the U.S. Under WTO rules developing economies are entitled to preferential treatment that was intended to give them the time and flexibility to adjust to freer trade with more advanced countries.

The WTO said that while some developing economies should still receive preferential treatment, others are now "globally competitive economies with significant market power."

While freer trade helped spur rapid growth in many economies, the WTO said it has not lifted the poorest countries, and it has disadvantaged factory workers in rich countries that were most exposed to low-wage competition.

At the same time, international rivalries and suspicions have grown more intense, and governments now place a greater stress on national security in deciding trade policy.

"Economic power is more widely distributed, production is more interconnected, and domestic policies generate larger cross-border spillovers," Staiger said. "And those changes now interact with intensifying geopolitical rivalry."

The ways in which governments intervene in economies have also become more varied and widespread, with China and others pursuing industrial policies that many of their trading partners regard as unfair subsidies to already competitive businesses.

The WTO didn't offer a blueprint for reshaping the world trade system to reduce tensions and prevent fragmentation, leaving those questions to its members.

Write to Paul Hannon at paul.hannon@wsj.com

(END) Dow Jones Newswires

September 15, 2026 05:59 ET (09:59 GMT)