US-China Trade War Risks Dragging the World into Recession

The escalating trade conflict between the United States and China has reached a critical juncture, with the head of the World Trade Organization (WTO), Ngozi Okonjo-Iweala, warning that the standoff could tip the global economy into recession. As tit-for-tat tariffs intensify and rhetoric hardens, the WTO’s latest forecasts paint a stark picture of the risks facing global trade, investment, and growth.

The Latest Escalation: Tariffs and Retaliation

In early April 2025, China imposed an 84 percent retaliatory tariff on all US goods entering its market, a sharp increase from the previous 34 percent rate. This move was a direct response to the United States raising duties on Chinese imports to 125 percent, as part of a broader effort by the Trump administration to pressure Beijing on trade practices and industrial policy5. The new Chinese tariffs affect every US product entering China, a market that imported $143.5 billion worth of American goods last year5.

China’s Ministry of Commerce has signaled a willingness to engage in dialogue, but only on the basis of mutual respect and equality. Officials in Beijing have warned that if the US persists in escalating the trade war, China will “follow through to the end,” indicating a readiness for a protracted confrontation5.

WTO’s Dire Forecasts: Trade Collapse and Global Recession

The WTO’s latest analysis reveals the gravity of the situation. The organization estimates that ongoing US-China trade tensions could slash the exchange of goods between the two economies by as much as 80 percent23. Given that the US and China together account for about 30 percent of global trade, such a dramatic reduction would have profound ripple effects across the world economy2.

The WTO warns that dividing the global economy into two rival blocs—one centered on the US and the other on China—could result in a long-term decline in global real GDP of nearly 7 percent25. This would be a seismic shock, with consequences comparable to the worst phases of the COVID-19 pandemic.

“This reciprocal strategy between the two largest economies, which together represent about 30% of international trade, has broader consequences that could significantly harm the global economic forecast,” the WTO stated2.

Impact on Global Trade Flows

The WTO has sharply downgraded its forecast for global merchandise trade. Instead of the 3 percent expansion projected in late 2024, the organization now expects trade in goods to fall by 0.2 percent in 202534. If the US follows through with its stiffest tariffs, the decline could reach 1.5 percent—the steepest drop since the pandemic-induced slump of 202034.

The impact will be especially severe in North America, where exports are forecast to fall by 12.6 percent and imports by 9.6 percent in 202514. The uncertainty generated by shifting tariffs and retaliatory measures is already acting as a brake on global growth, with the most vulnerable economies at greatest risk4.

Services Trade and Broader Economic Effects

While services trade is not directly subject to tariffs, it is not immune to the fallout. The WTO expects commercial services trade to grow by just 4 percent in 2025 and 4.1 percent in 2026—well below baseline projections of 5.1 percent and 4.8 percent, respectively3. Weaker demand for transport, logistics, travel, and investment-related services is expected as the goods trade contracts and business confidence erodes3.

The United Nations Conference on Trade and Development (UNCTAD) has also warned that global economic growth could slow to 2.3 percent as trade tensions and uncertainty drive a recessionary trend3.

Winners and Losers: Shifting Supply Chains

The disruption of US-China trade is expected to increase Chinese merchandise exports to regions outside North America by between 4 percent and 9 percent3. Other countries may find opportunities to fill the gap in the US market, particularly in sectors such as textiles, clothing, and electrical equipment3. However, these gains are unlikely to offset the broader losses from a global trade slowdown.

The Political Context: US Tariff Policy and Global Uncertainty

President Donald Trump has justified his aggressive tariff policy as a means to revitalize US manufacturing and counter what he describes as China’s unfair trade practices, including the dumping of cheap surplus goods into international markets5. However, the WTO has cautioned that tariffs are a blunt instrument with wide-ranging and often unintended consequences.

“Our simulations show that trade policy uncertainty has a significant dampening effect on trade flows, reducing exports and weakening economic activity,” said WTO chief economist Ralph Ossa4.

The Trump administration recently suspended its toughest set of tariffs for 90 days, giving more than 70 countries a window to address US trade concerns. Despite this temporary pause, the enduring uncertainty continues to weigh on global growth prospects4.

Risks of Economic Fragmentation

One of the most alarming risks identified by the WTO is the potential fragmentation of the global economy into two competing blocs. Such a split would not only reduce efficiency and raise costs but also stifle innovation and investment, leading to a lasting reduction in global living standards25.

Ngozi Okonjo-Iweala, the WTO Director-General, has repeatedly warned that forcing countries to choose between the US and China could “force countries to choose” and undermine the multilateral trading system that has underpinned decades of global growth15.

Outlook: Navigating an Uncertain Future

The outlook for global trade and economic growth remains highly uncertain. The WTO is forecasting only a modest recovery in trade volumes in 2026, assuming that the current tariffs and retaliatory measures are not further escalated3. However, the unprecedented nature of recent trade policy shifts means that predictions should be interpreted with caution3.

The situation is further complicated by the broader geopolitical context, with both Washington and Beijing viewing the trade war as part of a larger strategic rivalry. Analysts warn that the longer the standoff persists, the greater the risk of long-term economic damage and a global recession.

Conclusion

The US-China trade war, now entering a new and more dangerous phase, poses a clear and present danger to the world economy. The WTO’s warnings are stark: a prolonged standoff could slash global trade, fragment the international economic order, and trigger a recession with far-reaching consequences. As both sides dig in, the need for dialogue, compromise, and a recommitment to multilateralism has never been more urgent.

Without a resolution, the world risks not only a sharp downturn in trade and growth but also the unraveling of decades of economic integration and cooperation. The stakes could hardly be higher.