The global economy has not embraced decoupling but is showing signs of fragmentation, which would be “very costly” for all, Nikkei Assia reports citing World Trade Organization Director-General Ngozi Okonjo-Iweala.

The WTO chief also sounded a warning on the potential impact of the war between Israel and Hamas, as well as the constant threat of climate change.

“The 2024 outlook is still relatively optimistic, with a projection of about 3.3% growth for goods trade, but the risks are heavily to the downside,” Okonjo-Iweala told Nikkei.

Global free trade has faced headwinds of revision since 2017, when U.S. President Donald Trump withdrew America from the Trans-Pacific Partnership. Under his successor, Joe Biden, the U.S. has sought to limit China’s access to advanced technology in semiconductors and other areas, enlisting partners like Japan and some European nations in a strategy they call “de-risking.”

Okonjo-Iweala said the WTO does not see “big signs of a broader de-globalization.”

The volume of trade in goods and services is “still quite substantial,” at about $31 trillion, and “even trade between China and U.S. and China and EU are still relatively robust,” she said.

Yet some of the emerging signs of fragmentation warrant caution, the WTO chief said.

“Intermediate goods are measures of the health of global supply chains,” Okonjo-Iweala said. “And we saw the share of intermediate goods of world trade fall from an average of about 51% over the past three years to 48.5% in the first half of 2023. So we’re a little concerned about this.”

The WTO has estimated that if the world decouples into two trading blocs, global gross domestic product will fall 5% in the longer term.

This would be a “huge loss,” she said. “It’s like losing the whole of the economy of Japan.”

The WTO wants member states to support the free, stable and predictable flow of trade “because we believe we cannot solve the world’s problems at the moment without a free and fair trading system.”

The U.S., the EU and Japan have accused China of not following through on the commitments to free trade it made when joining the WTO, particularly on state aid for industry. Okonjo-Iweala acknowledged the criticism but said it runs both ways.

“The U.S. and many other members complain about the issue of industrial subsidies in China, and they feel that maybe China is not notifying to the WTO,” she said.

“But equally China also complains about the agricultural subsidies of the other members,” she added.

The WTO is studying the issue of subsidies “across the board” with the OECD, the IMF and the World Bank, and once it has gathered the evidence, “then we’ll be able to make some decisions about how do we tackle these problems of level playing fields.”

Group of Seven trade ministers discussed dealing with economic coercion — which includes unilateral trade restrictions — during talks last weekend in Osaka, Japan. Okonjo-Iweala emphasized that the WTO has a role in fighting such abuses.

She described talks between Canberra and Beijing over Chinese tariffs on Australian wine as “a very good example” for WTO members. The tariff dispute has been seen an as example of economic coercion by China.

The WTO chief also called for dialogue over China’s ban on imports of Japanese seafood following the release of treated wastewater from the Fukushima nuclear plant.

“We strongly encourage China and Japan to have good people-to-people dialogue,” she said.

The WTO this month slashed its 2023 forecast for global growth of trade in goods to 0.8%, down from the April projection of 1.7%. The downgrade reflects slowing economic growth in China and a weak eurozone expansion.

Trade growth is forecast to recover to 3.3% in 2024 but faces risks including the ongoing Middle East conflict.

“That is one of the regions where a lot of the world’s oil and gas comes out of,” Okonjo-Iweala said. “So inevitably this will have an impact.”