The global economy is undergoing seismic changes as the US-China rivalry deepens.

A new Allianz Research report reveals how these tensions disrupt trade, supply chains, and alliances, with consequences that could last for years.

A renewed US-China trade war looms on the horizon. If Donald Trump returns to the presidency, tariffs could increase significantly.

A contained conflict could shave 0.6 percentage points off global trade growth by 2026, while a full-blown trade war could cut it by 2.4 percentage points.

China and the EU are particularly vulnerable. An estimated $67 billion in exports from these regions are at risk, especially in industries like automotive manufacturing, metals, and pharmaceuticals.

Retaliatory measures could hit key US exports like agriculture, machinery, and electric vehicles.

China’s role in global trade has never been more significant. It now accounts for more than 15% of global trade, surpassing the US, which has fallen below 10%. Its manufacturing dominance and strategic investments, including the Belt and Road Initiative, have solidified its position as a trade superpower.

The US, however, is determined to counter China’s rise.

Restrictions on Chinese access to advanced technologies, including semiconductors, have slowed Beijing’s progress. Yet, China’s strong ties to emerging markets and its focus on innovation make it a formidable competitor.

Europe is caught in the middle. While it shares geopolitical alignment with the US, its economic ties to China are far stronger.

Germany alone exported nearly €100 billion to China in 2023, double the combined exports of France, the UK, and Italy.

Aligning with the US on tariffs is proving costly for the EU. European tariffs on Chinese goods affect 6.4% of imports, compared to 4% for the US.

Internal divisions within the EU complicate a unified approach, leaving the bloc vulnerable to both superpowers’ divide-and-conquer tactics.

Supply chains are evolving as geopolitical tensions reshape global trade.

Trade between aligned nations now accounts for 60% of global trade, up from 58% two years ago. At the same time, supply chain complexity has doubled since 2017, driven by diversification efforts.

Emerging trade hubs in Southeast Asia are benefiting from these shifts.

Countries like Vietnam, Malaysia, and Indonesia are projected to increase their share of global exports by 1.6 percentage points by 2029. However, these gains depend on $120 billion in infrastructure investment, particularly in ports.

Data is the next big battleground in global trade. Digital services now account for nearly half of all global trade in services.

Data-reliant sectors contribute 6.8% of GDP in the EU, 2.9% in the US, and 5.9% in China, underlining their growing economic significance.

Yet, rising restrictions on cross-border data flows could stifle innovation and hurt economies.

Allianz warns that overregulation could cost regions like the EU up to 0.1% of GDP, jeopardizing growth in key industries reliant on digital trade.

Geopolitical tensions are also impacting the environment. Conflicts in the Middle East have rerouted shipping away from the Suez Canal, leading to longer routes via the Cape of Good Hope. This detour has increased CO2 emissions by 50%.

Some shipping companies are trying to offset delays by increasing vessel speeds, which raises emissions. The combined impact of longer routes and faster speeds poses a significant challenge to global climate goals, adding to the environmental costs of geopolitical conflict.

The Allianz report paints a stark picture of the future. Global trade flows are splintering, supply chains are becoming more complex, and alliances are shifting.

Emerging trade hubs may thrive, but only with significant investments in infrastructure. Meanwhile, the US-China rivalry shows no signs of easing.

The EU struggles to balance its economic interests with geopolitical realities, and the world is moving away from seamless globalization.