Trade fragmentation could hit poor economies much harder than rich ones, WTO warns

New Delhi: The world’s poorest economies could pay the heaviest price if global trade fractures into geopolitical blocs, with the economic damage from a breakdown in multilateral cooperation falling several times harder on them than on rich countries, according to a new World Trade Organization report.

The WTO’s modelling puts a stark number on that divide. In its “Geo-fragmented world” scenario, where geopolitical alignment determines trade relationships, real GDP in least-developed countries (LDCs) is projected to fall 10.6% by 2050, compared with a 7.3% decline for middle-income economies and 2.9% for high-income economies.

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The gap becomes even wider in the report’s more severe “FTA world” scenario, in which the multilateral trading system breaks down and trade is organised through free trade agreements, with tariffs on non-FTA trade determined without cooperation. LDC GDP falls 16.5%, against declines of 8.8% for middle-income economies and 4.5% for high-income economies.

The poorest economies have the most to lose

The reason is structural rather than simply political. Many low-income economies depend disproportionately on international trade, external demand and the technology and investment spillovers that come with integration into global production networks.

That makes them particularly vulnerable when trade costs rise or access to major markets becomes dependent on geopolitical alignment.

The WTO says the costs would be especially uneven because many middle-income economies would face higher trade costs across a larger share of their trade, while high-income economies are relatively insulated by factors including substantial trade within established regional blocs.

The report’s export numbers are even more striking. Under the geo-fragmented scenario, LDC exports are projected to fall 33.2% by 2050, compared with a 13.1% decline for middle-income economies and 22.4% for high-income economies. Under the FTA world, LDC exports plunge 45.4%, versus 22.4% for middle-income economies and 13.1% for high-income economies.

In other words, the countries with the least room to absorb a trade shock are also the ones whose exports are projected to suffer the most.

Asia and Africa face another warning

The WTO report also cites IMF research showing that the pain can be particularly severe for developing economies caught outside the major geopolitical blocs.

In a fragmented world of two major blocs and a group of unaligned economies, the median unaligned economy in Asia would face real per-capita income losses 80% larger than those of developed economies, while the corresponding loss for an unaligned economy in Africa would be 120% larger.

That finding matters because trade fragmentation does not operate simply through tariffs. Higher trade costs, disrupted supply chains, weaker investment flows, restrictions on technology and increasingly divergent rules can all make it harder for smaller economies to participate in global production.

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The WTO warns that policies introduced to reduce security risks can themselves impose significant economic costs and deepen fragmentation.

A vulnerability that already exists

The broader global trade picture makes the WTO’s warning harder to dismiss.

UN Trade and Development says 95 of 143 developing economies remained commodity-dependent during 2021-23, including more than 80% of LDCs. Such dependence leaves economies exposed to swings in commodity prices and external shocks.

UNCTAD has also warned that higher energy prices, rising debt pressures and more restrictive trade policies risk constraining investment and development prospects in developing countries.

That vulnerability is particularly relevant as geopolitical conflict and trade restrictions increasingly interact. The WTO report says fragmentation can disrupt the international production networks underpinning the global economy, rather than merely making individual shipments more expensive.

Cooperation is worth more to the poorest

In an “Enhanced cooperation world”, where the WTO-centred system is preserved and global integration deepens, LDC real GDP is projected to rise 7.7% by 2050, compared with gains of 3.1% for middle-income economies and 2.5% for high-income economies.

LDC exports would rise 45% in that scenario, against 19.7% for middle-income economies and 15.5% for high-income economies.

This implies that poorer countries have more to gain from lower trade barriers because their economies have more room to benefit from greater access to markets, investment, technology and services.

The global headline numbers are already large. The WTO estimates that a geo-fragmented world would cut global GDP by 5.1% and exports by 18.6% by 2050. An FTA-only world would reduce GDP by 6.9% and exports by 26.9%, while deeper cooperation could lift global GDP by 2.9% and exports by 17.9%.

For rich economies, fragmentation is a major efficiency and growth problem. For poorer economies, the WTO’s numbers suggest it could become a development problem — threatening precisely the trade, investment and technology flows that have helped them narrow the gap with the industrialised world.