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Developing economies lead growth amid rising fragmentation and cost
 

By Carly Fields

 

The global trading system is poised for a significant slowdown, with UNCTAD projecting global economic growth to ease to 2.6% through 2026, a deceleration from the pace set earlier this year. While international trade is set to reach a record-breaking $35 trillion in 2025 – growth of 7% year-on-year and largely driven by a strong first half and a resilient third quarter - the momentum is softening under the pressure of escalating geopolitical friction, persistent policy uncertainty, and rising trade costs.

According to UNCTAD’s latest Global Trade Update, the trade landscape in the final quarter of 2025 and into the new year is a contrast of the emergence of developing regions as robust new engines of commerce against a backdrop of systemic caution.

Goods trade growth in the third quarter of 2025 was "fairly balanced between developed and developing economies," according to the report, with imports outside East Asia experiencing stronger growth.

Developing regions are setting the pace for export gains over the longer term. 

On a Trailing Four Quarters (T4Q) basis, which compares the last four quarters to the previous four, developing countries saw an 8% growth in exports, outpacing the 4% recorded by developed countries.

The momentum is particularly strong in certain developing regions. In Q3 2025, "goods trade growth was strongest in South America and the Pacific". Over the past 12 months, "Europe, East Asia, and Africa outperformed" in terms of trade performance.

 

Rise of South-South trade

A critical factor underpinning this shift is the continuing strength of South-South trade — commerce between developing countries. While it "posted below-average growth in the quarter”, it "remained well above average over the past 12 months, expanding around 8%", said the report.

When excluding the economies of East Asia, South-South trade growth stood at 3% for both imports and exports on a T4Q basis. This reinforces the report's assertion that the expansion of trade among developing economies is a positive influence, as it is "expected to continue, strengthening diversification, resilience, and opportunities to develop intra- and inter-regional trade networks". Furthermore, intra-regional trade expanded robustly in both South America and Africa in Q3 2025.

But while the regional numbers show strong performance in the developing world, the trade figures for major individual economies present a diverging picture.

In Q3 2025 goods trade, Brazil, the Republic of Korea, and South Africa all "recorded strong growth".

South Africa, in particular, saw a massive 12% quarter-on-quarter growth in imports and 10% in exports. Brazil also posted robust figures: 6% import growth and 4% export growth quarter-on-quarter.

Conversely, Japan and the US experienced "weaker performance". The US' goods exports declined by 2% quarter-on-quarter, though imports remained flat. China's trade exhibited a specific imbalance in Q3 2025, where "imports rose, but export growth stalled, even though the country remained the top exporter on a 12-month basis".

 

Bilateral tensions

But beneath the headline growth figures, persistent tensions are, in some cases, widening bilateral trade imbalances, reflecting ongoing geoeconomic fragmentation. The report notes that bilateral trade imbalances in goods "remain large in Q3 2025, though some have shrunk".

The US’ trade deficits with China, Canada, and the European Union "continued to shrink". For example, the T4Q deficit with China decreased by $28 billion in Q3 2025 compared with the previous four-quarters. However, the US deficit with Mexico ($214 billion T4Q) and Vietnam ($124 billion T4Q) both increased in Q3 2025.

China's trade relationships also showed significant shifts, and its surpluses with Vietnam and the European Union "grew considerably". The surplus with the EU is particularly notable, standing at $265 billion on a T4Q basis, with an increase of $22 billion in Q3 2025 alone.

The broader trend of fragmentation is further evidenced by shifts in trade interdependence. While "trade interdependence between China and the United States has changed little" over the past 12 months, "more significant changes have occurred among some of their respective trading partners". Countries like Malaysia, Vietnam, and Brazil have seen an increasing trade dependence on the US, while trade dependence on China has decreased for Australia and Brazil.

The report concludes that 2025 is set to be a strong year for international trade, with flows expected to grow faster than the global economy in real terms.

However, the forecast for 2026 is more subdued.

This deceleration is attributed to a confluence of negative factors by the report: "Slowing global economic growth, geopolitical fragmentation, continued policy uncertainty, and heightened vulnerability weigh on trade activity.” In addition, "rising trade costs contribute to an outlook marked by caution", said UNCTAD.

While positive factors exist, such as growing South-South trade, these are "unlikely to fully offset weaker economic momentum and rising trade frictions", concluded the report.