The World Trade Organization (WTO) on Tuesday urged its members to reform global trade rules or risk a slide into fragmentation that could significantly reduce economic output and hit poorer countries hardest.

In its annual report, the Geneva-based global trade body said existing rules have struggled to keep pace with shifts in economic power, the rise of industrial policy, digital trade and escalating political tensions between major powers.

The warning comes after the WTO's 166 members failed to reach agreement on a reform package at a ministerial meeting in Yaounde, Cameroon, in March, before relaunching talks in Geneva on issues including decision-making, dispute settlement and the challenges posed by subsidies and state intervention.

The WTO has struggled to find agreement on reforms among all members in the consensus-based organisation - as members are at different stages of economic development and with often conflicting interests.

WTO economists modelled a scenario in which the world fragments into competing geopolitical blocs and found global GDP would be 5.1% lower and exports 18.6% lower by 2050 than otherwise. In a more severe scenario, in which multilateral cooperation collapses and is replaced by a patchwork of free trade agreements, global GDP would fall 6.9% and exports nearly 27%.

By contrast, enhanced multilateral cooperation could raise global GDP by 2.9% and boost exports by almost 18%, according to the report. Least-developed countries would stand to gain the most from stronger cooperation, but could also suffer the largest losses from fragmentation.

TRADE AT A CROSSROADS
WTO Chief Economist Rob Staiger told Reuters the trading system was at a "critical juncture", citing four major challenges identified in the report:

• a broader distribution of economic power,
• growing state intervention in economies,
• changes in the nature of trade driven by digitalization and global value chains, and
• rising political friction.

"The rules are under strain and they really are having an impact. And if things fell apart at the global multilateral level, our scenarios are saying these would be the costs, and those costs would be quite large," Staiger said.

The findings come as countries increasingly pursue regional and sector-specific trade arrangements amid rising trade tensions and sweeping US tariffs.

In March, a group of WTO members agreed to move ahead with the organisation's first baseline digital trade rules through a plurilateral agreement, bypassing opposition from some members.

Staiger said regional trade agreements and plurilateral initiatives could strengthen the multilateral system, but warned they could also undermine it if they evolved into competing blocs.

Without a strong WTO framework, such arrangements risk diverting trade towards preferred partners rather than the most efficient producers and encouraging blocs to raise barriers against outsiders, Staiger said. WTO rules help limit discrimination against non-members and constrain how free trade agreements are structured, he added.

The WTO said trade policy uncertainty had reached unprecedented levels in recent years as governments increasingly deploy tariffs, subsidies, export controls and industrial policies.

Although about 72% of global merchandise trade still takes place under WTO most-favoured-nation tariff terms, down from roughly 80% in 2022, Staiger called the decline a "worrisome trend" that underscored the risk of a gradual erosion of the multilateral trading system.