Middle East tensions dent but do not erode North Africa hotel bookings
Middle East tensions dent but do not erode North Africa hotel bookings
Fundamentals hold despite Middle Eastern headwinds
Hoteliers in North Africa hope recent business stabilization will allow the industry to avoid long-term impacts from war in the Middle East. Pictured are the ruins of Dougga, a 1st century BC Roman city in the country of Tunisia. (Getty Images)
https://www.costar.com/article/442206566/middle-east-tensions-dent-but-do-not-erode-north-africa-hotel-bookings?
North Africa’s swiftly growing hotel market is entering a more uncertain phase as the war in the Middle East weighs on near-term travel demand and booking confidence.
Sources in the region said the upcoming season might fall short of earlier expectations, with some softness in inbound flows already visible. But investment pipelines and long-term development plans are unlikely to be affected, and the broader data paints a more resilient picture.
Any fall in performance will appear at odds with North Africa’s striking improvement pace seen in recent years, which has outpaced many hoteliers’ most optimistic expectations.
In the last half-decade, the hospitality sector in North Africa, particularly in Egypt, has demonstrated strong and sustained growth, supported by a steady increase in international tourist arrivals and the rising global appeal of Red Sea destinations, said Stuart Leven, CEO of Orascom Hotels Management.
For Orascom, which manages a network of hotels across the region, operational performance has been equally encouraging.
“Occupancy levels increased to 75%, compared to 71% in the previous year, while average room rates [in 2025] rose significantly, up 30% year-on-year,” Leven said. “This growth has been largely driven by strong international demand, with foreign guests accounting for around 83% of total occupancy.”
This performance is enjoyed by other players in the region, but since the start of the war in Iran, proximity to the Middle East is having a cost, notably for Egypt.
The U.S. Department of State included Egypt in a list of 14 countries on which it issued a “depart now” alert on March 2. Several European countries, including the United Kingdom, advised their citizens against traveling to some parts of the country.
Operations are impacted,” said Leila Ben-Gacem, owner of boutique hotel Dar Ben Gacem in Tunis, Tunisia.
The geopolitical situation in the Middle East is one of two key factors putting pressure on hotel operations in Tunisia, Ben-Gacem said.
The other reason is growing Airbnb demand, Ben-Gacem said, but she and Leven said they see the region’s long-term future as robust.
Branded hotels in Egypt saw occupancy rise to 69.9% in 2025, compared with 64.4% the previous year and 66.9% in 2019, according to CoStar data.
In the first quarter of 2026, the upward trend continued, with occupancy reaching 66.7%, up 5.9% year over year.
For full-year 2025, the average daily rate reached 6,471 Egyptian pounds ($122), up 31.6% from the previous year, while revenue per available room climbed 43% to EGP4,523.
Tunisia has posted similarly positive trends.
Occupancy in 2025 stood at 61.7% compared to 57.5% the previous year and 61% in 2019. In the first quarter of 2026, occupancy jumped 21.2% year over year to 46.4%.
In Morocco, the other main market in the region, along with Egypt, growth has been more moderate.
In 2025, occupancy inched up to 61% from 59.4% a year earlier and 59.3% in 2019. During the first quarter of 2026, occupancy growth was limited to up 0.7%, reaching 51.1%.
Momentum break
Sources said their experience on the ground reflects the trends seen in CoStar hospitality data.
"Prior to the escalation of the regional conflict, the hospitality markets across the Middle East and North Africa were entering 2026 with strong momentum backed by outstanding 2025 results,” said Oussama El Kadiri, partner and head of hospitality, tourism, and leisure, Middle East and Africa, at business advisory Knight Frank.
Egypt recorded all-time high visitation numbers, driven by the leisure segment’s recovery and the consolidation of Cairo as one of the region’s strongest cultural hubs.
The opening of the Grand Egyptian Museum on Nov. 4, 2025, reputedly the world’s largest archeological museum, is one major tourism driver.
El Kadiri said Morocco maintained its position as the most visited country in Africa for the second consecutive year. Marrakech recorded one of its strongest performances with a year-on-year increase in RevPAR of 15%.
“The [North African hospitality] market was not only recovering but moving into an expansion cycle,” said Nandini Roy Choudhury, senior analyst, Future Market Insights.
She said Egypt has Africa’s largest hotel pipeline, with 185 planned hotels and almost 46,000 rooms. This represents more than one-third of the continent's hotel pipeline.
Some European and long-haul travelers are likely to postpone or switch to destinations perceived as safer due to the war in the Middle East, even if Egypt’s main resort areas remain operational, she added.
“The immediate impact [of the war in Iran] is more visible in booking behavior, air connectivity concerns, insurance and risk perception, and in softer pricing in some leisure segments,” Choudhury said. “Travel advisories continue to highlight regional tensions and security risk, which can influence tour operators, airlines, and first-time leisure travelers."
Despite these persisting concerns, hoteliers do not expect the conflict to have a tangible impact on their North African operations.
“The [Iran] conflict is now creating a short-term confidence shock rather than fundamentally changing the long-term hospitality story,” Choudhury said.
Abdellah Essonni, regional vice president for North Africa at hotel management firm Aleph Hospitality, said hotel industry growth in the region will be secured by infrastructure development, driven in part by preparations for the 2030 FIFA World Cup, which is enhancing accessibility, capacity, and destination appeal. Morocco, Portugal and Spain are co-hosting the 2030 tournament.
“Morocco’s tourism sector remains resilient and is projected to experience strong momentum through the summer season,” Essonni said. “The country has further elevated its global profile as a premier sporting destination, notably through its successful hosting of the Africa Cup of Nations 2025."
Choudhury said her prediction is that hotel investment and development will become more selective but certainly not come to a standstill.
“Projects already under construction or backed by strong developers are likely to continue, particularly in strategic tourism zones,” she said. “Investors may delay final investment decisions, financing closures, land commitments, or brand signings for projects that are still at an early stage. Higher risk premiums, more conservative demand assumptions, and pressure on short-term ADR and occupancy forecasts could affect feasibility models."
At Orascom, Leven remains optimistic.
“With recent signs of stabilization in the region, we are optimistic about continued recovery and sustained demand,” he said. “Fundamentals … remain strong, and we are confident in our ability to navigate external dynamics while maintaining solid operational performance."
When to get the asset manager involved on a hotel acquisition
The earlier in the process, the better
Prathmesh Mehta (Westmont Hospitality Group)
https://www.costar.com/article/351535579/when-to-get-the-asset-manager-involved-on-a-hotel-acquisition?
During any hotel acquisition, I am sure the question always comes up: “Is it the right time to involve the asset manager?“
There is no clear answer.
Several deals never get to the finish line. Acquisition teams are reviewing multiple deals and asset managers are tight on time as they have current portfolios to operate. However, the ideal time for any asset manager (AM) to get involved in a deal may be even before the letter of intent is signed and acquisition teams have a strong feeling about the deal.
From my experience of working in investment banking, we often employed the concept of the "fire wall,” a barrier between departments within an investment bank such as trading and mergers-and-acquisitions, so they don’t know what the other is doing. This is specifically created for ethical purposes and to avoid any conflict of interest. But in hotel acquisitions, we neither have this wall nor do we want one.
As much as strong underwriting is very important and sets the base, the most successful hotel acquisitions are the ones where the acquisition team and AM have worked as partners from the start of the deal. This not only helps to reconfirm the assumptions, but it also gives a complete picture and mitigates risk associated with all the moving parts (which we know are many!) since both sides look at the same opportunity through different lenses.
The reality check or second opinion
Acquisition teams are brilliant at identifying, negotiating and structuring deals. They have a good relationship with brokers and strong handle on the capital markets. The question then is: Why do we see some acquisitions fail? The answer lies in the gap between potential and operational reality.
This is where the AM can play a valuable role in the acquisition process. An AM looks at the underwriting from a different vantage point. It’s not about being a critic; it’s about successful execution strategy.
Say, for example, underwriting assumption builds significant labor cuts or assumes increases in market share. The AM evaluates these assumptions through considerations such as the effect on service scores in case of such labor cuts and changes in strategy/marketing budget in case of increased market share versus the competitive set.
These and several other questions should not be looked at as challenges to the deal, but rather questions to make the deal stronger by mitigating risks.
Building trust before closing: Lenders and partners
In today’s world, capital partners and lenders are very sophisticated. All have seen several great pitches and at least some properties struggle post-acquisition because the business plan looked great on paper but didn’t materialize in practice.
AM’s involvement from the front end in site visits, due diligence calls and even contributing to the investment committee presentation sends a positive and powerful signal. It helps build credibility and trust, which can help ride any waves post-closing.
The capital partners are assured that they are not just buying a building but rather an executable plan. From the lender perspective, this also brings a level of comfort as they are engaging with the person they will be dealing with post-closing while building confidence on business plan execution.
Strategic value of asset manager
The involvement of the AM at the acquisition phase itself will help create efficiencies in several areas of the deal. Consider, for example, the capital plan. Most underwriting will identify the items to be fixed, including new HVAC, roof repairs and all the necessary evils. These are very important and need to be handled. An AM will be able phase things in a manner to maximize projects that drive rate and revenue while maintaining the integrity of the asset.
AM can play a vital role in several areas such as negotiating the property improvement plan, optimizing the franchise agreement, identifying value-add opportunities that are not captured in underwriting and can create incremental values, landlord relationships (in case of leasehold assets), etc.
These inputs from AM often uncover hidden value that justifies the purchase price or creates negotiating leverage.
Asset management and acquisition: A partnership
We are all working toward the same goal — a successful transaction for all stakeholders. To achieve this, we need to see an effort where financial acumen and operational expertise are integrated from the start of the deal.
While philosophically acquisitions and asset management are considered sequential steps, a successful acquisition process should be considered more like riding a tandem bicycle with both pedaling together, contributing their strengths and heading in the same direction toward the finish line.
So, when is the right time to involve your asset manager in an acquisition? In my opinion, the earlier the better.
Prath Mehta is Director of Asset Management at Westmont Hospitality Group in Houston, where he oversees a portfolio of luxury, upscale and limited-service hotels. He has previously been involved in various roles in acquisitions and advisory in the U.S., Canada, and India.
The opinions expressed in this column are his personal opinions and do not necessarily reflect the opinions of Westmont Hospitality Group and its affiliated companies.
Geopolitics and the geometry of global trade: 2026 update
https://www.mckinsey.com/mgi/our-research/geopolitics-and-the-geometry-of-global-trade-2026-update
By
Tariff splashes, AI waves, and the ripples reshaping global trade
At a glance
- Trade in 2025 did not retrench, despite dire predictions. Both US imports and Chinese exports reached new highs. Southeast Asia deepened its role in global manufacturing, India gained ground in selected sectors, and Brazil expanded commodity exports to China. All told, trade grew faster than the global economy, while advanced economies and China reoriented away from geopolitically distant trading partners.
- AI-related trade emerged as the most substantial engine of growth. Exports of semiconductors and data-center equipment accounted for one-third of global trade growth as Asian hubs—Taiwan, South Korea, and parts of Southeast Asia—supplied markets around the world, particularly the United States.
- China expanded its role as a “factory to the factories.” Increasing shipments to fast-growing emerging economies, it ramped up exports of industrial components and capital goods, supplying the essential machinery and parts needed to power advanced manufacturing hubs worldwide.
- Tariffs triggered trade readjustment, with US–China trade falling by around 30 percent. The United States replaced about two-thirds of the gap with imports from other sellers, while Chinese exporters of consumer goods from electric cars to toys cut prices by an average of 8 percent to find buyers in new markets. ASEAN thrived, increasing trade with both economies, but the European Union faced a double squeeze: more Chinese imports and higher US tariffs.
- Shifts in trade point to some durable trends—and a need for resilience to shocks. AI, emerging market growth, and China’s evolving manufacturing focus are not flashes in the pan, nor is the growing role of geopolitics in reshaping trade—a shift that’s been apparent in the data for nearly a decade. Short-term developments require responses, too. Tariff shifts in 2025 were abrupt—and 2026 has already delivered its own jolts. Companies need long-term thinking coupled with agility.
A variable-width bar chart (Marimekko-style) plots trade growth by sector (height) against each sector’s share of 2024 global trade (width). AI-related trade grew close to 40 percent versus a 6.5 percent global average in 2025, while energy resources contracted (around −9 percent). Takeaway: 2025 trade growth was led by AI and other advanced manufacturing, not by resources or basic manufacturing.
The past year was the most tumultuous in memory for global trade, even beyond the splash from tariff announcements. Longstanding alignments came under strain, and trade relationships were reassessed—not just among geopolitically distant partners, but among historic allies. Yet trade increasingly moved toward more closely aligned economies, while continuing to grow in step with global output.
Building on three years of McKinsey Global Institute research documenting the emerging realignment of trade along geopolitical lines, this report examines how these dynamics evolved in 2025. It traces the way tariffs rippled through the network alongside major waves influencing trade, such as AI and emerging market growth. Our analysis covers more than 90 percent of global trade across ASEAN economies, Brazil, China, the European Union, India, the United States, and their trading partners.1
Developments remain in flux. Geopolitical conflict has sharply intensified in recent weeks. Separately, in February 2026 the US Supreme Court struck down the legal basis for many of the tariffs introduced in 2025, prompting new measures under alternative authorities. Despite these uncertainties, many structural shifts underway in global trade are likely to persist.
Chapter 1.
The new world of global trade
By the end of 2025, US tariff rates stood at their highest level since World War II. The increases reshaped trade along geopolitical lines, deepening a realignment already underway and pushing more than $165 billion in trade away from the US–China corridor.2
It would be natural to see tariffs as the defining trade story of 2025 (see sidebar “Tariffs in flux”).
Yet other forces proved equally consequential in an increasingly contested global landscape.
One was the artificial intelligence boom, and the race across the world to build data centers. Shipments of the chips, servers, and networking equipment needed for their construction accounted for about one-third of trade growth, much of which was between geopolitically aligned economies.
Another underappreciated force was China’s shift upstream in global production. It exported to a wider range of markets, shipping more manufacturing inputs and capital goods, while exports of finished products fell—changing not just how much trade flowed across borders, but what goods moved. Lower prices helped China’s exporters find demand for consumer goods as access to the US market narrowed.
These shifts rippled across the global trade network. ASEAN and other emerging economies expanded their roles in reconfigured supply chains. The European Union faced growing competitive pressure.
Several outcomes in 2025 ran against common expectations. Despite higher tariffs, global trade did not retrench. Both US imports and Chinese exports reached new highs. In fact, the United States emerged as the largest single driver of global import growth, largely due to firms stockpiling ahead of the tariffs, alongside strong demand for AI-related equipment.
Trade keeps growing, but reorients geopolitically
Although global commerce faced significant disruption in 2025, aggregate trade patterns largely followed existing trends (Exhibit 1). Goods continued to travel longer geographic distances and flowed increasingly between geopolitically aligned partners. Routes shifted, yet trade kept expanding roughly in line with global economic growth (see sidebar “Methodology”).
Exhibit 1
A set of three line graphs tracks total goods trade (2017–25) alongside the average geographic distance of trade (2000–25) and the geopolitical distance of trade (2000–25). From 2024 to 2025, geographic distance increased by about 0.3 thousand km, while geopolitical distance fell by roughly 1.2 percent versus a −0.9% annualized shift over 2017–24. Takeaway: Global trade kept expanding, but flows increasingly moved toward more geopolitically aligned partners even as supply chains still spanned long physical distances.
As in prior years, tensions between the United States and China were the single biggest force influencing the geopolitical distance traveled by trade (Exhibit 2). Both economies continued to reorient away from each other and toward geopolitically closer partners, accelerating a trend underway since 2017. US tariff increases, which were applied broadly but were generally highest for China, reinforced the shift.
Exhibit 2
A grouped bar chart compares 2017–24 vs 2024–25 changes in geopolitical distance, geographic distance, and total goods trade across major economies. For the entire 2017–25 period, geopolitical distance fell sharply for the United States (about −12.7 percent), China (about −11.2%), and the EU (about −9.6 percent), while other regions shifted less; at the same time, total goods trade rose strongly (for example, ASEAN about +67.7% and Brazil about +68.2% over 2017–25). Takeaway: the headline “shorter geopolitical distance” trend is concentrated in the largest advanced economies rather than being universal.
The European Union’s trade also shifted toward more geopolitically aligned partners, largely because exports to China fell. Trade with the United States rose in the first half of the year, driven by large flows of pharmaceuticals and some metals ahead of expected tariff rollouts. Trade with Russia continued to decline, though from a much smaller base than in the years immediately after the invasion of Ukraine.
These shifts can be read as a form of “derisking” in the United States, China, and Europe as firms managed geopolitical pressures. But there was limited broad-based evidence of firms bringing production home or relocating it to nearby partners. Canada’s and Mexico’s shares of US trade declined, contributing to supply chains reaching farther on average.
Outside the largest economies, the picture differed. Major emerging economies continued to expand trade across the geopolitical spectrum. India stood out for a marked increase in geographical distance, reflecting growing shipments of smartphones to the United States, about 13,000 kilometers away.
AI emerges as the engine of trade
Booming AI investment left a clear mark on global trade in 2025. Shipments of the hardware needed to develop and run the technology increased by almost 40 percent during the year, accounting for about a third of global trade growth—an impact that has received far less attention than AI’s effects on economic growth, investment, financial markets, or jobs (Exhibit 3). This expansion unfolded amid heightened geopolitical tensions and tighter trade restrictions.
Exhibit 3
A set of bar charts shows 2024 vs. annualized 2025 goods trade growth by industry group (AI-related goods, advanced manufacturing, resources, basic manufacturing) for the world and major regions. AI-related goods grew around 37 percent globally, with especially large increases in the United States (about +66%) and more moderate growth in China (about +16%) and the EU (about +22%). Takeaway: AI hardware and data center buildout were the dominant engines of 2025 trade growth across regions.
The rapid buildout of data centers required large volumes of semiconductors, servers, and networking equipment from tightly linked supply chains running through Taiwan, South Korea, and parts of ASEAN. The United States added roughly half of the world’s new data center capacity in 2025, making it the largest source of demand.6 US trade of AI-related goods rose by roughly 66 percent, or an estimated $220 billion.
China was the second-largest builder of data centers, but trade restrictions limited its ability to import some of the most advanced chips and semiconductor manufacturing tools for much of 2025, leading it to rely heavily on domestic supplies. As a result, China’s trade in AI-related goods increased by only 16 percent, or an estimated $85 billion.
The European Union added less capacity than either the United States or Mainland China and saw moderate growth, albeit from a low base. At the same time, some of its exports—most notably extreme ultraviolet lithography machines—remained critical to leading-edge chipmaking in Taiwan and South Korea.
Even as AI-related trade surged, policy restrictions shaped where goods could flow. The United States restricted exports of advanced computing chips, high-bandwidth memory, and chipmaking tools, coordinating with key partners. The Netherlands and Japan imposed their own licensing restrictions on advanced semiconductor manufacturing equipment, while South Korean chipmakers curtailed exports of high-bandwidth memory and halted technology upgrades at their Chinese facilities. China, for its part, tightened controls on critical minerals used in semiconductor manufacturing. Beyond goods trade, several countries imposed restrictions on the transfer of proprietary AI technologies, reflecting differing concerns around national security, data privacy, and intellectual property.
McKinsey Global Institute research on foreign direct investment (FDI) announcements indicates that the AI infrastructure buildout will continue globally, as new large data center and semiconductor fabs break ground—with flows between US and Asian economies driving most of the activity in semiconductor manufacturing. The resulting capacity is likely to support further growth in related trade between aligned economies.
Even beyond AI-related demand, trade in advanced manufacturing categories grew faster than in other sectors. Shipments of trains, planes, and ships were strong, while demand for industrial machinery was driven by emerging economies. This underscores how long-term, global economic waves are affecting trade, and will likely continue to do so, even amid disruptions from tariffs and other forces (Exhibit 4).
Exhibit 4
A variable-width bar chart (Marimekko-style) plots trade growth by sector (height) against each sector’s share of 2024 global trade (width). AI-related trade grew close to 40 percent versus a 6.5 percent global average in 2025, while energy resources contracted (around −9 percent). Takeaway: 2025 trade growth was led by AI and other advanced manufacturing, not by resources or basic manufacturing.
Growth in basic manufacturing was more modest, with tariffs reshuffling trade flows rather than expanding them, particularly as US–China trade declined. The performance of resource trade was mixed in 2025, as the value of energy trade fell on the back of lower prices, even as volumes held. Minerals and energy are likely to remain important for trade given their role as critical inputs for advanced manufacturing (see sidebar “Advanced manufacturing drove trade in 2025”).
US–China trade shifts ripple outward
Plummeting trade between the United States and China had widespread ramifications in 2025. The decline in US–China trade reduced global trade growth by about 10 percent during the year, with reduced US imports from China accounting for roughly 85 percent of that decrease. Resulting supply gaps in the United States and underutilized capacity in China forced firms to seek new suppliers and buyers. Some economies took on bigger roles in supply chains, while others mainly absorbed displaced Chinese exports (Exhibit 5).
Exhibit 5
A stacked bar chart compares corridor-level trade changes in 2025 against the 2017–24 average, paired with a stacked area chart of corridor shares over time. Total corridor changes rose from about $840 billion (2017—24 average) to about $1.355 trillion in 2025, driven by increases in United States—rest of world (+32.3%) and China–rest of world (+22.9%), while United States–China trade fell (−12.3%). Takeaway: trade did not collapse in 2025; instead, it was rerouted, with the United States–China weakening at the center of a broader reshaping of corridors.
The United States managed to replace about two-thirds of the goods it previously sourced from China—valued at more than $80 billion—by turning to alternative suppliers (Exhibit 6). India, for example, increased smartphone exports to the United States to levels equal to roughly 40 percent of what China had supplied, and ASEAN economies replaced about two-thirds of the value of US laptop imports that had come from China.
Exhibit 6
A stacked bar decomposition chart compares the annualized 2024–25 change in United States trade (imports +$149 billion; exports +$117B) and China’s trade, showing the main drivers such as AI-related goods (+$180 billion in United States imports), tariff-related frontloading (+$131 billion), and the US–China trade drop (−$130B). Takeaway: 2025’s US–China reshuffle was shaped as much by AI demand and frontloading as by tariff-driven diversion, while China’s gains came largely from intermediate and capital goods exports.
For its part, China also redirected exports away from the United States, although replacement levels were lower than on the US side. Shipments to the United States fell by roughly $130 billion in 2025, of which China replaced about $55 billion on a like-for-like basis. Much of this displaced supply flowed to Europe and to emerging economies in Asia, the Middle East, and Africa. These were largely consumer goods, often sold at lower prices, adding pressure—particularly in Europe—on manufacturers of products such as vacuum cleaners, digital cameras, and clothing.
For both the United States and China, trade shifts in 2025 went well beyond replacement dynamics. For US firms, frontloading was another response to announced tariffs. They brought forward nearly $130 billion in additional pharmaceuticals and gold imports ahead of potential tariff increases, later lifting exports as large amounts of gold were re-exported (see sidebar “US frontloading”).
Some US imports did fall—by around $115 billion—much of it in goods subject to tariffs. However, these declines were concentrated in a narrow set of categories, including cars and household goods such as furniture.13 There is limited evidence that domestic manufacturing offset these lost imports. Instead, the shortfall reflected a combination of weaker demand and inventory drawdown.
In total, US imports rose by roughly $150 billion during the year, driven in part by the increase in AI-related purchases noted above, which were unrelated to the tariffs. All told, US trade with the rest of the world accounted for more than one-quarter of trade growth, exceeding its historical share.
For China, higher tariffs accelerated a shift away from consumer goods exports to the United States and toward components and equipment supplied to manufacturers across the globe. In these categories, exports to the rest of the world grew by roughly $220 billion, pushing the country’s trade surplus to a record.
China moves upstream in production networks
For years, Chinese firms had been increasing production of intermediate inputs used in final goods assembled in the country, supported by domestic policies that encouraged higher local content. Exports of those goods have been rising in turn. In 2025, this trend accelerated. Shipments of intermediate inputs—including memory chips, other semiconductors, and industrial components such as valves—rose by 9 percent, up from 6 percent the prior year (Exhibit 7).
Exhibit 7
A stacked column chart decomposes the annualized 2024–25 change in China’s exports by end use (final consumption, capital goods, intermediate goods) and destination region. Final-consumption exports fell about $28 billion (−2 percent), while capital goods exports rose about $34 billion (+5%) and intermediate goods exports rose about $142 billion (+9%), with growth concentrated outside the United States. Takeaway: China’s 2025 export expansion was driven primarily by intermediate and capital goods that support manufacturing elsewhere, not by consumer finished goods to the United States.
Some of these exports amounted to indirect replacement of lost US-bound sales as parts, particularly in electronics, were used by manufacturers elsewhere to make goods later exported to the United States. Smartphone trade exemplified this pattern, with a decline of about $15 billion in smartphone exports, matched by a comparable increase in component shipments, particularly to India.
In many other cases, however, rising exports of parts and machinery were not tied to replacing China’s lost US sales. Instead, they supported the expansion of manufacturing capacity in third markets, particularly emerging economies, deepening China’s role as a supplier of production inputs rather than a final-goods exporter.
ASEAN trade surges, while Europe faces mounting pressure
Regions differed sharply in the extent to which they captured opportunities created by the decline in US–China trade.
ASEAN stood out in 2025 for its rapid trade growth and expanding role as a global connector. Imports of equipment and manufacturing inputs rose, as the region took on processing and assembly work once concentrated in China, while exports of finished goods increased, particularly to the United States (Exhibit 8). Some have questioned the extent to which this reflects a shift in substantive manufacturing, rather than minimal final assembly or even transshipment—passing along goods originating in China to skirt US tariffs.16 While this is a heavily debated topic, some analysts find that Chinese inputs represent well under half of the value of final goods exported from ASEAN economies to the United States.17 Furthermore, the region’s exports grew faster than its imports, indicating that domestic manufacturing is adding more value.
Exhibit 8
A pair of stacked bar charts compares import and export growth for ASEAN versus the EU-27 (excluding intra-EU), with segments showing partner regions. In 2025, ASEAN imports grew about 11 percent (around $208 billion) and exports grew about 14 percent (around $264B), outpacing the EU’s roughly 7 percent import and export growth (about $189B and $194 billion). Takeaway: ASEAN’s role as a global connector strengthened in 2025, with faster growth and broader links than Europe.
In contrast, the European Union did not fill the gap left by declining US imports from China, even though it produces many of the same goods and could have served as an alternate supplier.
In 2025, excluding frontloaded shipments of pharmaceuticals and gold, EU exports grew by about 5 percent. Exports to its two largest trading partners—the United States and China—faced headwinds, while exports to emerging economies rose by over 6 percent. Intra-EU trade also expanded at a similar pace.
Headwinds were strongest in the auto sector, which faced steep US tariffs and intensifying competition from China’s electric vehicle (EV) producers. Exports to the United States fell by $8 billion, while exports to China declined by $7 billion. At the same time, imports of Chinese-made vehicles into the European Union rose by about $4 billion despite barriers meant to curb them.
Tariffs, AI investment, and China’s continued shift upstream in production reshaped global trade flows in 2025. The chapters that follow examine how these forces played out across major regions, as firms rerouted supply chains, responded to shifting competitive pressures, and navigated changes in market access in an unusually unsettled year for global trade.
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