Fragmentation of the global economy into separate blocs would be “extremely costly” and make the world a less stable place, the World Trade Organization said in a report published Tuesday. 

The report, which notes that geopolitical tensions among major economies are beginning to affect trade flows, offers a counter argument to the ascendant view that the last quarter century of global economic integration was a mistake.

“The WTO is not perfect — far from it,” wrote WTO Director-General Ngozi Okonjo-Iweala. “But the case for strengthening the trading system is far stronger than the case for walking away from it.”

WTO Director-General Ngozi Okonjo-Iweala

“The alternative to rules-based integration is power-based fragmentation and a world of greater uncertainty, increased socioeconomic exclusion and heightened environmental decline,” she said.

5% GDP Hit

The WTO estimates that the cost of splitting the world trade system into separate blocs would be about 5% of real income at the global level, with some developing economies withstanding double-digit losses.

The Geneva-based trade body urged policymakers to pursue greater international cooperation and broader economic integration — an approach the WTO described as “reglobalization.”

“Globalization is at a crossroads and we need to think about where we go,” WTO Chief Economist Ralph Ossa said during an interview at the organization’s headquarters in Geneva. “The various crises have generated the perception that globalization exposes us to increased risks.”

Ossa said that policymakers should “embrace trade instead of rejecting it, if we want to overcome the most pressing challenges of our time.”

Economic Fragmentation

Without singling out President Joe Biden’s administration, the WTO report focused on an “evolving narrative” that questions whether international trade does more harm than good.

Over the past year, US Treasury Secretary Janet Yellen, National Security Advisor Jake Sullivan and US Trade Representative Katherine Tai have all talked of a different approach to free trade in speeches that supported the Biden administration’s embrace of a more protectionist approach.

Such views are increasingly manifesting themselves in the form of trade tensions between China and the US, the WTO said, and that’s affecting the composition of bilateral trade flows — particularly for sensitive product categories, like semiconductors.

National Security

The WTO report found that national-security concerns are “playing a rapidly increasing role in trade policy” and illustrated how trade openness, historically has helped foster stability in international relations.

“Security concerns are no longer exclusively expressed in relation to conflict but encompass the much wider notion of economic security,” the report said. “As a result, security concerns percolate through trade policy more widely.”

The WTO examined the nexus of trade and peace by documenting the strong negative correlation between trade openness and conflict probability. The report cited studies that found a doubling of trade between two economies reduces the probability of conflict by 20% on average.