A 'Prisoner’s Dilemma' is driving the trade war & the costs could be huge

The world is caught in a “Prisoner’s Dilemma” over trade, according to the WTO’s World Trade Report 2026. Governments have a clear incentive to protect their own producers by raising tariffs or restricting imports. The problem starts when everyone else does the same, as per the trade organisation.

What looks like a sensible move for one country can quickly turn into a bad deal for everyone, it says, adding that retaliatory tariffs can shrink trade, raise uncertainty, squeeze exporters and push up prices for consumers. “The result can be mutually damaging, leaving economies worse off than if they had kept markets more open.”

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“In this sense, unilateral trade restrictions can create a prisoner’s dilemma: each government may have an incentive to protect its own market, but all governments can be better off if they cooperate to keep markets more open.”

What's the cost?

The stakes become much clearer when the WTO looks at what happens if countries move away from deeper cooperation. Its simulations suggest that fragmentation could come at a steep economic cost.

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If the world splits into rival geopolitical blocs, global GDP could be 5.1% lower and global exports 18.6% lower, compared with a more cooperative path, the report estimates. A world where the WTO disappears and is replaced by a patchwork of free-trade agreements would be even costlier, with global GDP falling 6.9% and exports 26.9%.

Cooperation, on the other hand, comes with a sizeable upside. The WTO estimates that stronger multilateral cooperation could lift global GDP by 2.9% and exports by 17.9%.

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Therefore, the choice between cooperation and fragmentation could make a difference of 5% to 10% of global real GDP.

Protection trap

The WTO says that when one country restricts trade, it can impose costs on trading partners that it may not fully consider.

Left to their own devices, governments therefore have a reason to set tariffs higher than they would if they accounted for the damage to foreign exporters. And if the other country responds in kind, both sides can end up stuck with higher trade barriers, even though both could benefit from lowering them.

Trade negotiations change that equation, as per the WTO. Instead of deciding tariffs unilaterally, countries can trade concessions: one lowers its barriers in return for the other doing the same. That reciprocal bargain gives both sides a reason to open their markets.

The organisation says that it does not believe all protection is bad, arguing that governments acting alone may not see the full cost of their decisions. That can lead to what the report calls “beggar-thy-neighbour policies” and, ultimately, a “mutually destructive prisoner’s dilemma.”

The WTO's role, therefore, is less about forcing countries to embrace free trade and more about giving them a way to avoid retaliating against each other. It provides a forum to negotiate market access and then puts those bargains behind common rules.

Why exports matter

There is also a reason trade negotiations can sometimes sound strangely one-sided, with countries fighting hard for access for their exporters while treating imports almost like a concession.

The WTO says the logic is actually quite practical. Exporters are often the businesses that feel the pain most directly when another country raises trade barriers. They therefore have a strong incentive to flag those barriers and push their governments to negotiate them down, says the report.

And the WTO is not arguing that every country should simply throw open its borders to trade. It says that countries should work towards “reduction of tariffs and other barriers to trade”, but how open an economy should be is ultimately up to each government, depending on its own needs and priorities.