The US-China trade war is increasingly dividing the world into two camps, leading allies to prioritise trade between themselves over unfriendly nations, a World Trade Organization (WTO) working paper suggests – with some important caveats.

The paper examines friendshoring, defined as the “overall trade fragmentation along geopolitical lines”, divided between hypothetical “East” and “West” blocs, whose members are determined by nations’ UN voting records.

Trade between these two blocs has grown 4% more slowly than trade within them since the start of the war in Ukraine. This trend is only observed for goods at the lowest levels of the Harvard Product Complexity Index, which are predominantly raw materials and basic foodstuffs.

The decoupling between the US and China is more complex. The report identifies two main periods of weakening trade relations: one in 2018 following the “beginning of trade tensions” and one in 2022 following Russia’s invasion of Ukraine.

Despite a rebound in trade in 2020, attributed to “the role of China in global supply chains during the Covid-19 pandemic”, the overall trend has been downward. Trade between the two countries is now 10% lower than in 2018.

This decline has impacted goods across all levels of complexity, and since the start of the Ukraine war, the most significant drop has been in complex goods. This suggests that the US-China trade war is “qualitatively different from the alignment of global trade with geopolitical affinities”, the report says.

Conversely, the paper finds “no evidence of an increased regionalisation of world trade” between the Covid-19 pandemic and now, suggesting that nearshoring “did not have a large impact on world trade” in the period.

Within Asia, however, this may not remain the case in the longer term: research from HSBC and East & Partners suggests corporates in China are increasingly looking to trade with their Southern neighbours of Vietnam, Thailand and Indonesia.

Global trade outlook

On the same day the working paper was released, the WTO issued its October update to its Global Trade Outlook, in which it lowers its 2025 global merchandise trade volume growth forecast.

The downwards revision is largely driven by declining European exports. The intergovernmental organisation now expects a 3% increase in growth next year, down from 3.3% in April, though at the same time it has raised its 2024 forecast from 2.6% to 2.7% growth.

Asia is the main driver behind this year’s growth, with exports projected to rise by as much as 7.4%. Vietnam had the highest merchandise export growth of any country in the first half of the year at 16%, and Hong Kong, Taiwan and Korea all posted export growth above 10% in the same period.

Vietnam was identified as a major destination for businesses looking to move operations out of China in a recent McKinsey report.

Other developing regions are close behind, with trade in the Middle East, South America and the Commonwealth of Independent States all expected to grow by around 4.6%.

Europe, meanwhile, is expected to see a contraction of 2.3%, largely driven by slowdown in Germany’s automotive and chemical sectors.

Western Europe’s four largest economies – Germany, Italy, France and the United Kingdom – all experienced a decline in merchandise exports in the first half of this year, as did the export hubs of Belgium and the Netherlands. Despite this, major European banks largely reported stable trade finance income in their half-year reports.

The WTO report also notes that growth in value terms has remained flat, suggesting a fall in export and import prices of 2.6% for this year. Much of this decline is led by energy prices, which spiked in 2022 following Russia’s invasion of Ukraine but are now close to pre-war prices.

The WTO notes that merchandise trade value is still moving in a “positive direction”, however, with second quarter growth of 2% in 2024 compared to an 8% drop in the third quarter of 2023.