Executive Summary

A renewed but contained trade war could cost global trade growth 0.6pp in 2026, while a full-blown trade war would cost up to 2.4pps. In his second term as President, Donald Trump is likely to increase tariffs on Chinese and other strategic imports (to 25% for the former and to 5% for the rest of the world, excluding Mexico and Canada), which would decrease global trade by -0.6pp in 2026 as most measures would kick-in from the second half of 2025. China and the EU would bear most of the cost, with USD67bn of exports at risk in 2025-26, especially in automotive manufacturing, transport equipment and metals. Their retaliation measures are likely to hit US pharmaceuticals, automotive, metals, agrifood and machinery. In the event of a full-blown trade war (60% tariffs on China and 10% on the rest of the world, including Mexico and China), the toll would increase to 2.4pps of global trade growth.  

The outlook for US-China relations remains bleak. While the US economy was unrivaled from the 1970s to the 2000s, its share of global trade has since fallen from 15% down to below 10% while China’s share now stands above 15%. In parallel, China overtook the US to become the world’s largest manufacturer in 2009. Although global trade remains strongly intertwined with the US economy, due to the strength of the US consumer and the irreplaceability of the USD, China has emerged as a new superpower in the global economy, banking on its critical role in global manufacturing and its large and rising domestic market. Against this backdrop, confrontations between the two countries range from geopolitical hotspots (Russia, Taiwan, Asia-Pacific more broadly) to trade and tech wars as they are advancing different geoeconomic agendas.  

American godfathering vs China’s “silk” doctrine. China has been deploying economic statecraft for decades with quite some success. Its “silk” doctrine was trade-centric and industry-centric and it mostly relied on soft power and connective influence – with the exception of the recent tensions around Taiwan, the country did not engage in overt military pressure/action. On the other hand, American “godfathering” rests on four pillars: (i) an unwavering commitment to protect core national interests at all costs (i.e. Donald Trump’s “America First” policy, which was quietly maintained by the Biden administration), (ii) securing loyalty within the network of historical allies, (iii) an active economic and military stance against rivals and (iv) expanding American influence and control across new domains (e.g. space, tech, AI etc.).  

Alignment with the US is costly for the EU, which needs to find its own (green) way in the new geoeconomic order. While the US and the EU share a common stance on geopolitical issues, their economic interests are not aligned. The EU has not fully committed to establishing a joint trade and investment wall with the US against China, and China continues to acquire EU companies, even as the US has taken a more restrictive approach against Chinese capital. Nevertheless, we see a 79% correlation between the US imposing tariffs on China and the EU imposing tariffs on China one year later, and a 76% correlation between US and EU non-tariff measures actions against China within the same year. These are most costly to the EU: tariffs imposed on China cost the US an equivalent of 4% of its Chinese imports, compared 6.4% per year for the EU. Yet, the EU itself is not safe from US protectionist measures. The ambivalence vis-à-vis China also stems from internal divisions across the EU. There is a risk that the US and/or China follow a divide-and-conquer strategy by exploiting internal European divisions to seek bilateral deals that would improve their own negotiating positions against the block. There is one way for the EU to navigate through this storm: the bloc, which directed 35% of its subsidies to the transition in 2023, should leverage its green policies as its main economic statecraft tool to both support its industries and achieve its climate goals.

Governments’ deployment of economic statecraft is making supply chains more complex but opens the way for new trade champions. Over the past two years, bilateral trade flows between geopolitically close countries have been gradually rising (+2pps to 60% of global trade). While US imports have been breaking away from China, China has been exporting more to its own geopolitically close partners, such as Russia, Singapore, Vietnam, the UAE and Saudi Arabia. Such reconfiguration in global trade flows suggests that trade patterns may be becoming more complex. Our supply-chain complexity index, which takes into account shifts in trade flows, geographic  distance, geopolitical alignment and our country risk ratings, shows that supply-chain complexity in 2023 has risen 2x compared to 2017, or 6x compared to the pandemic years. Amid this complexification and the new geoeconomic order, countries are aiming to position themselves as next-generation trade hubs. Looking at efficiency, connectivity and trade potential, we identify 25 next-generation trade hubs in Asia and fast-growing mid-size countries with already established manufacturing or logistics hubs (e.g. Malaysia, Vietnam, Indonesia, the Philippines, the UAE etc.). These 25 economies are expected to grow their share of global exports by +1.6pp over the next five years, reaching USD1,274bn. As these hubs grow to account for up to 21.3% of all global exports by 2029, they will also need to invest USD120bn on port infrastructure alone to maintain their momentum.  

Picking sides: Asia and Africa are closer to China and the US is losing influence on Latin America. By looking at the next-generation trade hubs and other major economies’ geopolitical, trade and cross-border investment links with the US and China, respectively, we compute geoeconomic distance scores relative to both countries. Our scores range from 0 (very close) to 1 (very distant) and show that China’s sphere of influence includes more next-generation trade hubs from the emerging world, while most of the traditional “Global North” countries remain closer to the US. Unsurprisingly, the UK is the closest country to the US, followed by Ireland and the Netherlands, with Canada in 4th place and Mexico only in 28th. Most African and Asian nations are closer to China (on average 0.5 for African nations vs 0.7 distance with the US and 0.4 for Asian nations vs 0.6 distance with the US). After Hong Kong, Canada is the second closest economy to China – managing to remain close to both superpowers. Australia, South Korea and Greece are among the other nations that have managed to maintain the same distance with both the US and China. They are geopolitically closer to the US but retain very strong trade and investment relations with China – a position that could potentially become increasingly uncomfortable and force them to pick a side, should the new geoeconomic order centered on the US-China confrontation deteriorate significantly. Even in an intensified trade war scenario between the US and China (and beyond), business opportunities will continue to remain relatively more elevated in the new trade hubs as China will continue to invest and the US will increase its trade flows with them as they will be relatively more attractive than China.