By Andrea Shalal

WASHINGTON (Reuters) -The head of the World Trade Organization said she is urging the U.S. and China to de-escalate trade tensions, warning that a decoupling by the world's two largest economies could reduce global economic output by 7% over the longer term.

WTO Director-General Ngozi Okonjo-Iweala told Reuters in an interview the global trade body was extremely concerned about the latest spike in U.S.-China trade tensions and had spoken with officials from both countries to encourage more dialogue.

"We're obviously worried at any escalation of U.S.-China tensions," she said, noting the two sides had backed away from their first tariff escalation earlier this year, averting more serious consequences and she hoped that would happen again.

"Similarly, we are really hoping that the two sides will come together and they will de-escalate, because any U.S.-China tensions and U.S.-China decoupling (would) have implications not just for the two biggest economies in the world, but also for the rest of the world," she said.

Both sides, Okonjo-Iweala said, understand the importance of good relations, given the implications for the global economy and other countries.

Any kind of decoupling that divides the world into two trading blocs would result in "significant global GDP losses in the longer term - up to 7% global GDP losses and double-digit welfare losses for developing countries," she said.

ESCALATING TENSIONS REMAIN 'SERIOUS RISK'

The WTO last week sharply lowered its 2026 forecast for global merchandise trade volume growth to 0.5% from its previous estimate of 1.8% growth in August, citing expected delayed impacts from U.S. President Donald Trump's tariffs. It raised its forecast for global goods trade growth to 2.4% for 2025.

Those forecasts were issued before the relative calm of recent months was shattered last week when China imposed new export controls on rare earth metals needed for the technology sector, and Trump responded by imposing new 100% duties on Chinese imports starting next month.

Okonjo-Iweala said she told officials from the Group of 20 major economies on Wednesday evening that there could be no global financial stability without global trade stability.

"Pressures on the system have not eased and may intensify," she told the group. "The full effects of recent tariffs are still to be felt. Trade diversion is fueling protectionist sentiment elsewhere. And escalating tensions between the United States and China remain a serious risk."

Okonjo-Iweala said most WTO members had refrained from joining in the tariff war, and 72% of global trade was still following WTO rules despite a series of bilateral trade deals signed by the U.S. with other countries.

The rules-based multilateral system was proving resilient despite the most severe policy shock in eight decades, she said.

But Okonjo-Iweala said organizations like the WTO should use the current multilateralism crisis to undertake long-sought reforms and make the global trade body more flexible and efficient, and able to take advantage of new trade opportunities in digital trade, services and green trade.

"There's absolutely no doubt that there are global problems that cannot be solved by any one country alone, and you will need global cooperation to do it, and that's where multilateralism will still be very, very relevant," she said. "But to make sure that the organizations are really appreciated, we have to reform, and at the WTO, we are ready to work on this."

Okonjo-Iweala said she had a good meeting on Wednesday with Deputy U.S. Trade Representative Joseph Barloon, who was confirmed last week as the U.S. ambassador to the WTO.

She said she was very appreciative that the U.S. had removed the WTO from its list of planned spending cuts to international organizations, and efforts were underway to settle U.S. arrears to the trade body.