The global trade landscape throughout 2025 and into 2026 represents a critical juncture for the multilateral trading system, characterized by a paradoxical coexistence of record-breaking trade volumes and unprecedented institutional fragmentation. While preliminary data for 2025 indicates that global trade reached a historic milestone, exceeding $35 trillion for the first time with a 7 percent annual increase, the qualitative nature of this growth reveals deep-seated structural shifts and rising risks. The acceleration of protectionism, geopolitical tensions, and the reconfiguration of global value chains (GVCs) are redefining the flow of goods and services, forcing a rigorous re-examination of the World Trade Organization (WTO) legal framework. As the global economic growth rate is projected to remain subdued at approximately 2.6 percent in 2026, the impetus for nations to adopt inward-looking trade policies has intensified, particularly as major economies like the United States, China, and the European Union experience loss of momentum.   

The current epoch is marked by the strategic use of tariffs not merely as revenue-generating instruments but as pivotal tools of industrial policy and national security. This resurgence of tariff competition is occurring against a backdrop of institutional crisis within the WTO, specifically the continued paralysis of the Appellate Body, which has undermined the enforceability of trade rules. The result is a transition from a rules-based order toward a “power-based” system where unilateral measures are frequently appealed “into the void,” creating a state of legal limbo that threatens the predictability and stability foundational to international commerce.   

The Macroeconomic Context and the Surge of Manufacturing Tariffs

The escalation of tariff competition in 2025 was most pronounced in the manufacturing sector, driven largely by the United States’ pursuit of strategic and geopolitical objectives. This shift has led to an uneven rise in trade-weighted average applied tariffs across various sectors and trading partners. The manufacturing sector experienced a significant jump in applied tariffs from 1.9 percent in 2024 to 4.7 percent in 2025, a trend that is expected to persist into 2026 as governments continue to utilize trade barriers to shield domestic industries from perceived overcapacity and external shocks.   

Global Trade Tariff Trends by Sector (Trade-Weighted Average)	2024 Applied Tariff (%)	2025 Applied Tariff (%)
Agriculture	5.7	6.7
Natural Resources	0.8	0.8
Manufacturing (Overall)	1.9	4.7
– Automotive and Transport	2.9	7.3
– Machinery	1.7	5.7
– Electrical Machinery	1.0	3.0
– Iron and Steel	1.0	2.2
– Chemical Products	1.3	1.9
– Other Base Metals	2.0	6.3
– Plastics and Rubber	2.9	6.5

Data synthesized from UN Trade and Development (UNCTAD) reports.   

The data underscores a targeted approach to tariff imposition, with sectors critical to the green transition and high-tech industrialization—such as automotive and machinery—facing the steepest increases. This sectoral focus reflects a broader trend of “green protectionism,” where environmental objectives are intertwined with industrial competitiveness. Furthermore, the deceleration of the Chinese economy, with growth projected at 4.6 percent in 2026, combined with weak domestic demand and a property slump, has led to a surge in Chinese exports as the country seeks to offload excess production in global markets. This “China shock” 2.0 has particularly affected the European Union, which has become a primary target for redirected Chinese goods that are increasingly excluded from the United States market due to prohibitive tariffs.   

The Legal Architecture of Non-Discrimination: MFN and National Treatment

The foundational principles of the WTO—Most-Favored-Nation (MFN) treatment and National Treatment—are designed to prevent the very type of discriminatory tariff competition currently observed. MFN treatment, enshrined in Article I of the General Agreement on Tariffs and Trade (GATT), requires that any advantage, favor, or privilege granted by a member to a product from any other country must be extended “immediately and unconditionally” to like products from all other WTO members.   

The Scope and Significance of the MFN Principle

The MFN principle acts as a “force for unifying treatment” at the most liberal level, ensuring that trade benefits negotiated bilaterally are multilateralized across the entire WTO membership. It historically emerged as a response to the protectionist trade blocs of the 1930s, such as the British sterling bloc, which are widely believed to have exacerbated the Great Depression and contributed to the onset of World War II. In the contemporary context, MFN serves several critical functions:   

• Economic Efficiency: It allows smaller and less powerful economies to benefit from the trade concessions that larger economies grant to each other, preventing them from being marginalized in a power-based system.   
• Administrative Simplicity: A single set of tariffs for all trading partners reduces the complexity and costs associated with maintaining elaborate rules of origin, which are otherwise necessary to determine which country’s products qualify for specific rates.   
• Stability and Predictability: By prohibiting horizontal discrimination between trading partners, MFN ensures that companies can compete based on their efficiency and quality rather than political alignments.   

However, the MFN obligation is not absolute. Exceptions are permitted for regional free trade areas and customs unions (Article XXIV), preferential treatment for developing countries (the “Enabling Clause”), and essential security interests (Article XXI). The current challenge lies in the increasing frequency with which these exceptions—particularly those related to national security—are invoked to justify measures that would otherwise constitute a violation of Article I.   

National Treatment and Internal Regulations

Complementing the MFN principle is the National Treatment obligation under GATT Article III, which prohibits discrimination between imported and domestic products once the former have entered the market. This principle ensures that internal taxes and regulations are not used as “hidden” trade barriers to protect domestic producers. The synergy between MFN and National Treatment creates a legal framework intended to provide a level playing field for global commerce, yet the rise of industrial subsidies and domestic-content requirements (often tied to green transition policies) is testing the boundaries of Article III compliance.   

The Mechanics of Tariff Commitments: Bound vs. Applied Rates

Central to the predictability of the global trading system is the distinction between bound tariffs and applied tariffs. Bound tariffs represent the maximum tariff level for a given commodity that a WTO member has committed not to exceed in its “Schedule of Concessions”. These bindings are the result of reciprocal negotiations and are intended to lock in trade liberalization over time.   

The Concept of Binding Overhang

In practice, many countries, particularly developing ones, apply tariffs at rates significantly below their bound levels. The gap between the bound tariff and the Most-Favored-Nation applied rate is known as the “binding overhang” or “tariff water”. While this overhang provides governments with the “policy space” to adjust tariffs in response to economic fluctuations without violating WTO law, trade economists argue that a large overhang reduces the predictability of a country’s trade regime.   

Trading Partner	Simple Average Bound Tariff (%)	Simple Average MFN Applied Tariff (%)	Binding Overhang (Percentage Points)
United States	3.4	3.3	0.1
European Union	5.1	5.1	0.0
China	10.0	7.5	2.5
India	50.8	18.1	32.7
Brazil	31.4	13.3	18.1
Mexico	33.7	7.1	26.6

Data derived from WTO and World Bank WITS databases (2022/2023 figures).   

The data indicates that while developed economies like the U.S. and EU have virtually no binding overhang, meaning any tariff increase would likely violate their WTO commitments, emerging economies like India and Mexico possess substantial legal room to raise tariffs unilaterally. This structural difference has become a point of contention in trade negotiations, as developed nations push for greater “tariff certainty” while developing nations defend their need for flexible industrial policy tools.   

If a member raises its applied tariff above the bound level, it must provide “compensation” to affected members in the form of lower tariffs on other products. Failure to do so can lead to a dispute settlement process, where the complainant may be authorized to take retaliatory measures, such as imposing its own higher tariffs on the offending member’s exports. However, the current paralysis of the WTO’s judicial arm has effectively neutralized this deterrent, as members can appeal adverse rulings “into the void,” preventing the adoption of final reports and the authorization of retaliation.   

Contingent Protection: Anti-Dumping, Countervailing Duties, and Safeguards

As formal tariff rates have been historically lowered through successive rounds of GATT/WTO negotiations, countries have increasingly turned to “trade remedies” as legitimate, WTO-sanctioned mechanisms for raising trade barriers. These are collectively known as contingent protection and include anti-dumping (AD) duties, countervailing duties (CVD), and safeguards.

Anti-Dumping and the Problem of Unfair Pricing

Anti-dumping measures are the most frequently used trade remedy and target the pricing behavior of private firms. Dumping occurs when a product is sold in an export market at a price lower than its “normal value,” which is typically the price charged in the exporter’s home market. The legal foundation is Article VI of the GATT and the Anti-Dumping Agreement (ADA).

To impose anti-dumping duties, a government must conduct an investigation proving:

1. Dumping: The existence and margin of dumping.
2. Injury: Material injury or threat thereof to the domestic industry producing the like product.
3. Causation: A direct causal link between the dumped imports and the injury.

The dumping margin (DM) is calculated as follows:

DM = {(NV – EP)-EP} x100

where NV is the Normal Value and EP is the Export Price.

Anti-dumping measures are often preferred by domestic industries because they are country-specific and can remain in place for extended periods through “sunset reviews” every five years. Critics argue that the administrative process is often biased toward finding dumping, serving as a form of “hidden protectionism” that protects inefficient domestic producers at the expense of downstream users and consumers.   

Countervailing Duties and Government Subsidies

Countervailing duty (CVD) laws target government intervention rather than private firm behavior. They allow members to impose duties on imports that have received “actionable” or “prohibited” subsidies from their home governments, causing injury to the importing country’s industry. The Agreement on Subsidies and Countervailing Measures (SCM Agreement) defines a subsidy as a “financial contribution” by a government that confers a “benefit” and is “specific” to an enterprise or industry.   

The rise of state capitalism and industrial policy has made CVDs a flashpoint in international trade, particularly regarding China’s use of subsidies for its electric vehicle (EV) and green-tech sectors. The European Union has recently shifted toward a more defensive stance, imposing duties of 20 to 50 percent on strategic Chinese sectors in response to what it views as market-distorting state support.   

Safeguard Measures: The Emergency Escape Clause

Safeguard measures, governed by GATT Article XIX and the Agreement on Safeguards, differ fundamentally from AD and CVD in that they apply to “fairly traded” goods. They are temporary measures used to protect a domestic industry from a sudden, unforeseen surge in imports that causes or threatens “serious injury”—a higher legal threshold than “material injury”.   

Key characteristics of safeguards include:

• MFN Application: Unlike AD and CVD, safeguards must be applied to all imports of the product regardless of their origin.   
• Unforeseen Developments: The surge must be the result of developments that were not anticipated at the time the country made its tariff concessions.   
• Limited Duration: Safeguards are strictly temporary, generally limited to four years (extendable to eight), and are intended to provide the domestic industry with “breathing space” to adjust to competition.   
• Compensation and Retaliation: A country imposing a safeguard is generally expected to provide compensation to affected trading partners. If no agreement is reached, the affected members may be permitted to retaliate after three years.   

Feature	Anti-Dumping (AD)	Countervailing Duties (CVD)	Safeguards (SG)
Legal Basis	GATT Art. VI & ADA	GATT Art. VI & SCM	GATT Art. XIX & Agreement on SG
Trigger	Unfair pricing by foreign firms.	Unfair foreign government subsidies.	Unforeseen surge in “fairly” traded goods.
Standard of Harm	Material Injury.	Material Injury.	Serious Injury.
Targeting	Specific companies/countries.	Specific countries.	Erga Omnes (Global).
Duration	Indefinite (via 5-year reviews).	Indefinite (via 5-year reviews).	Max 8 years (no renewals).
Retaliation/Comp.	Not required if rules followed.	Not required if rules followed.	Required or retaliation allowed.

The Geopolitical Challenge: National Security and Article XXI

The Geopolitical Challenge: National Security and Article XXI

Perhaps the most significant threat to the WTO legal order is the proliferation of measures justified under the “National Security Exception” of Article XXI. This provision states that nothing in the GATT shall be construed to prevent a member from taking “any action which it considers necessary for the protection of its essential security interests” relating to fissionable materials, arms traffic, or actions taken “in time of war or other emergency in international relations”.   

The “Self-Judging” Controversy

For decades, Article XXI was a “dormant” provision, rarely invoked because members understood that an expansive interpretation would create a “loophole” through which any protectionist measure could be justified. However, the United States, starting with the Trump administration and continuing under President Biden, has aggressively used Article XXI (notably Section 232 of the Trade Expansion Act of 1962) to impose tariffs on steel, aluminum, and high-tech components.   

The U.S. position is that Article XXI is “wholly self-judging,” meaning that the mere invocation of the clause by a member precludes any substantive review by a WTO panel. This view holds that national security is a matter of sovereign discretion and that an international body lacks the competence to second-guess a state’s assessment of its own security needs.   

Landmark WTO Rulings: US Steel/Aluminum and Hong Kong Marking

In a series of landmark rulings in late 2022, WTO dispute panels decisively rejected the U.S. “self-judging” interpretation. In cases brought by China, Norway, Switzerland, and Turkey (DS544, DS552, DS556, DS564), the panels ruled that while members have a “margin of appreciation” in defining their security interests, the WTO retains the authority to objectively review whether the conditions for invoking the exception exist.   

The panels established a strict standard for Article XXI(b)(iii), finding that:

1. Objective Review: The phrase “which it considers” does not extend to the sub-paragraphs. Whether a situation is an “emergency in international relations” is an objective fact that a panel must determine.   
2. Definition of Emergency: An “emergency in international relations” must be a situation of “utmost gravity” comparable to war, representing a “breakdown or near-breakdown” of relations.   
3. Failure of the U.S. Defense: In the steel and aluminum cases, the panel found that the global overcapacity and the economic challenges cited by the U.S. did not constitute an “emergency in international relations” under the meaning of the treaty.   
4. Hong Kong Marking Case (DS597): The panel ruled that the U.S. requirement to mark Hong Kong goods as “China” violated MFN rules and could not be justified as a security measure, as the situation in Hong Kong—while concerning—had not resulted in a total breakdown of relations.   

The United States has rejected these rulings as “flawed” and appealed them “into the void,” ensuring that the measures remain in place and the rulings have no legal effect. This has led to a profound “de-legalization” of the trade system, where raw power and sovereign assertion take precedence over adjudicated rules.   

The Institutional Crisis: The Demise of the Appellate Body

The current trade wars are exacerbating, and being exacerbated by, the collapse of the WTO’s Dispute Settlement Mechanism (DSM). Since December 2019, the Appellate Body (AB)—the “crown jewel” of the WTO—has been unable to function because the U.S. has blocked all new appointments to the seven-member panel.   

Reasons for the U.S. Blockade

The U.S. concerns regarding the Appellate Body are longstanding and bipartisan, centering on perceived “judicial overreach”. Specific grievances include:   

• Advisory Opinions: The AB allegedly issued rulings on issues not necessary to resolve the specific dispute.
• Binding Precedent: The U.S. argues that the AB treated its past reports as binding precedent, creating a system of “judge-made law” rather than a member-driven system.   
• Standard of Review: The AB was accused of failing to show proper deference to the factual findings of panels, particularly in anti-dumping cases.   
• 90-Day Deadline: The AB frequently exceeded the mandatory 90-day time limit for issuing reports without member consent.   

The Consequences of Paralysis

The paralysis of the AB has created a “legal void.” Under the Dispute Settlement Understanding (DSU), if a party appeals a panel report, the report cannot be adopted by the Dispute Settlement Body (DSB) until the appeal is completed. With no AB to hear the appeal, the report remains in limbo indefinitely.   

Impact Category	Legal and Economic Consequences of AB Paralysis
Enforceability	Most WTO disputes are now appealed “into the void,” depriving them of legal force.
Rule Compliance	States are increasingly taking “trade matters into their own hands,” ignoring obligations.
Systemic Usage	New case filings have dropped to roughly 1/3 of historical levels (from ~30 to ~10 per year).
Predictability	The lack of finality in rulings creates significant uncertainty for global supply chains.
Fragmentation	Emergence of “workarounds” like the MPIA creates a tiered, non-universal legal system.

To mitigate this, the European Union, China, and over 50 other members created the Multi-Party Interim Appeal Arbitration Arrangement (MPIA), which uses Article 25 of the DSU to provide an interim appellate function. However, since the U.S. is not a participant, any dispute involving the U.S. as a respondent can still be blocked through an appeal to the non-existent Appellate Body.   

Trade Flow Reconfiguration and “Friend-Shoring”

The combination of rising tariffs, geopolitical tensions, and the breakdown of multilateral enforcement is driving a massive reconfiguration of global value chains. Firms are moving away from cost-driven offshoring toward risk management, a trend often called “de-risking” or “friend-shoring”.   

Shifting Bilateral Dynamics

The annual growth rates of selected bilateral flows relative to the global average reveal the scale of this shift. Between 2024 and 2025, trade between the U.S. and Vietnam grew by 18.3 percent, while U.S.-China trade contracted by 14.2 percent. Similarly, China-Mexico trade saw a decline of 11 percent, potentially reflecting U.S. pressure on Mexico to limit the re-export of Chinese components.   

Bilateral Trade Flow	2018–2024 Growth (%)	2024–2025 Growth (%)
United States – Viet Nam	+10.7	+18.3
China – Viet Nam	+6.6	+8.7
EU – United States	+2.4	+6.2
China – European Union	+0.8	-3.9
Mexico – United States	+1.1	-3.8
China – Mexico	+8.1	-11.0
China – United States	-1.8	-14.2
Canada – United States	-0.5	-11.0

Source: UNCTAD calculations based on national statistics.   

This data suggests that global trade is not necessarily “deglobalizing” but is rather “fragmenting” and “reglobalizing” through new routes. Vietnam and other Southeast Asian nations are emerging as critical “connectors” in the global economy, as they often import intermediate inputs from China to manufacture finished products for the U.S. and European markets—a practice that is now drawing scrutiny and the threat of “anti-circumvention” tariffs.   

The Road to MC14: Reform and the Future of the WTO

The 14th Ministerial Conference (MC14), set to take place in Yaoundé, Cameroon, in early 2026, is widely viewed as a critical “lifesaver” opportunity for the WTO. The conference must address the systemic imbalances and institutional failures that have characterized the last decade of trade policy.   

Key Reform Priorities

• Dispute Settlement Reform: The top priority for many members is the restoration of a fully functioning and effective dispute settlement system by the end of 2025, a goal set at the previous ministerial (MC13) but yet to be achieved. Proposals include establishing clearer limits on AB mandates, strictly enforcing timeframes, and clarifying the “advisory” vs. “binding” nature of reports.   
• Industrial Policy and Subsidies: The European Union is pushing for a “full work strand” on industrial policies and subsidies to tackle non-market practices. This is viewed as essential to managing the tensions arising from the green transition and high-tech competition.   
• Digital Trade and the E-commerce Moratorium: Members face a decision on whether to extend the moratorium on customs duties on electronic transmissions, which is essential for the stability of the burgeoning $4 trillion digitally deliverable services sector.   
• Development and Special Treatment: The African Group and other developing nations are advocating for “Special and Differential Treatment” (S&DT) to be made more precise and effective, ensuring that trade rules support rather than hinder industrialization and food security in the Global South.   
• Plurilateralism vs. Multilateralism: A growing debate centers on “variable geometry”—the idea that groups of willing members should be allowed to negotiate new rules (plurilateral agreements) that are then integrated into the WTO framework, even if not all members join.   

The African Group’s Perspective

The African Group has declared that MC14 must be a “development-driven” conference. They are particularly concerned about “tariff peaks and tariff escalation” that affect their key exports and the disproportionate flexibility granted to developed nations in agricultural subsidies. They have defended the “consensus rule,” arguing that it ensures the voices of smaller economies are not ignored by major powers.   

Conclusions and Strategic Outlook

The analysis of global trade in 2025 and 2026 reveals a system under unprecedented strain. The shift from a multilateral, rules-based equilibrium toward a fragmented, power-based competition has resulted in a significant rise in manufacturing tariffs, the abuse of security exceptions, and the crippling of international trade adjudication.

The WTO’s MFN principle, once the bedrock of global stability, is being sidelined by unilateral actions and “friend-shoring” strategies. While global trade remains resilient in volume, its nature is becoming increasingly opaque and costly. The 10.7 percent jump in applied manufacturing tariffs over 2025 and the redirection of “excess production” are signals of a broader industrial struggle that the current WTO rulebook is ill-equipped to handle.

For the rules-based system to survive, the MC14 conference must deliver more than just a “roadmap” for reform; it must produce concrete commitments on the restoration of the dispute settlement system and a shared understanding of the limits of “national security” in trade. In the absence of such reform, the world risks a return to the “tit-for-tat” protectionism of the past, where economic logic is subordinated to geopolitical rivalry, and the benefits of global integration are lost to a new era of trade fragmentation.