19th October 2025, Kathmandu
The escalating trade and technology rivalry between the United States and China represents a significant downside risk to the global economic outlook for 2025 and beyond. Despite a recent, cautious upward revision of the International Monetary Fund’s (IMF) global GDP growth forecast to 3.2%, this projection is overshadowed by the growing threat of a full-blown trade war.
IMF Warns of Economic Threat
IMF Managing Director Kristalina Georgieva has issued a strong appeal to both global powers, urging them to swiftly resolve trade tensions, warning that the continuation of protectionist measures and the weaponization of critical resources could severely undermine worldwide market stability and economic recovery. The core of this rivalry stems from fundamental disagreements over trade imbalances, intellectual property, and, critically, the race for technological supremacy in future-defining sectors like Artificial Intelligence (AI) and semiconductors.
Immediate and Systemic Impacts on Global Supply Chains
The trade conflict is no longer confined to tariffs on a few goods; it has evolved into a strategic competition that is fundamentally restructuring global supply chains, introducing severe volatility and new systemic risks. This strategic decoupling, or bifurcation, is forcing multinational corporations to adopt “China+1” or “friend-shoring” strategies, shifting production to countries like Vietnam, India, and Mexico. While diversification can enhance long-term resilience, the immediate consequences are higher operational costs, logistical delays, and increased regulatory complexity across multiple industries.
The Critical Role of Rare Earth Elements
One of the most potent geopolitical levers in this conflict is China’s dominance over Rare Earth Elements (REEs). China controls an estimated 80% of the world’s rare earth processing capacity, which are vital materials for high-tech manufacturing, including electric vehicle (EV) batteries, smartphones, wind turbines, and advanced defense systems. China’s recent announcement to tighten export licensing and controls on these critical inputs, effective from October 9, 2025, represents a strategic “chokepoint.” IMF Chief Kristalina Georgieva explicitly highlighted the risk of disruptions in the rare earth supply, warning it could disproportionately impact global economic growth by raising costs and throttling the production of clean energy and high-tech components worldwide. Any cutoff would increase uncertainty and negatively affect an already fragile global economy.
The Cost of Tariffs and Trade Barriers
The ongoing “tariff tit-for-tat” continues to function as a tax on imported goods, directly raising costs for businesses and consumers. Reciprocal port fee structures and non-tariff barriers, such as administrative requirements and regulatory hurdles, further complicate international commerce and increase shipping costs for all maritime trade operations between the two nations. For consumers, this translates to higher prices for a wide range of goods, from electronics to furniture and agricultural products. Experts warn that an escalating scenario, such as the threatened 100% tariff on all Chinese imports by the US, would act as a prohibitive tax that could crush bilateral trade and lead to significant reductions in global output.
The Technology Decoupling and the AI Race
The technology sector faces the most significant and transformative long-term impact. The US and China are locked in a “Tech Cold War”—a fierce competition for dominance in advanced technologies like Artificial Intelligence (AI) and semiconductors. The strategic use of export controls on critical software and cutting-edge chip-making equipment is designed by the US to slow China’s progress in developing advanced AI capabilities for both economic and military advantage.
Semiconductors: The New Strategic Battleground
The US has tightened export control measures, aiming to restrict China’s ability to obtain advanced computing chips and manufacture advanced semiconductors. This has accelerated China’s long-term goal of achieving self-sufficiency in the entire semiconductor supply chain. The weaponization of this supply chain forces companies to choose geopolitical alignment, resulting in a bifurcated market. Companies aligned with US manufacturing bases, such as Taiwan’s TSMC, are seeing revenue surges from protected domestic demand, while Chinese competitors are facing significant headwinds due to equipment access restrictions. This fragmentation not only slows global innovation but also creates distinct, incompatible technological ecosystems, threatening to reduce global GDP by as much as 7% in the long run if trade blocs fully decouple. The future of AI adoption and its productivity gains—a key driver of future global growth—is directly tied to the outcome of this chip war.
The IMF’s Cautious Outlook and Downside Risks
The IMF’s latest global GDP growth forecast of 3.2% for 2025 is an improvement from earlier, more pessimistic projections. This upward revision reflects a global economy that has shown more resilience than expected so far, partly due to the effective tariffs collected being lower than initially estimated and the agility of companies in quickly rearranging supply chains. However, this cautious optimism is entirely conditional and does not account for a significant escalation of the US-China trade dispute.
The IMF explicitly identifies that the main downside risk is the potential for further unresolved trade tensions, which, coupled with supply chain disruptions, could lower global output by an estimated 0.3 percentage point next year. Beyond trade, the IMF also points to other serious risks: China’s structural struggles in its property sector, mounting fiscal pressures in major economies, and the inherent uncertainty surrounding the AI investment surge, which could lead to a market bust if expected productivity gains fail to materialize.
Ultimately, the consensus among global economic analysts is clear: for the world economy to stabilize and maintain its modest growth trajectory, the dialogue and cooperative resolution of US-China trade tensions are paramount. A renewed, all-out trade war would be a lose-lose scenario, deepening global uncertainty and complicating the post-pandemic, post-conflict economic recovery for every nation.
For More: IMF Warns of Economic Threat