IMF cautions against trade fragmentation
Official warns such trend could diminish global economic gains and increase risks
The International Monetary Fund said the global economy is becoming more fragmented along economic and national security lines and offered suggestions on how to address the situation.
In a speech to the Stanford Institute for Economic Policy Research on Tuesday, Gita Gopinath, IMF’s first deputy managing director, said global economic ties are changing “in ways we have not seen since the end of the Cold War”.
“Countries are reevaluating their trading partners based on economic and national security concerns,” she said. “Foreign direct investment flows are also being redirected along geopolitical lines. Some countries are reevaluating their heavy reliance on the dollar in their international transactions and reserve holdings.”
Gopinath said that despite such trends, there are not yet clear signs of deglobalization at the aggregate level, and the ratio of goods trade to GDP has been roughly stable — fluctuating between 41 and 48 percent.
“But under the surface, there are increasing signs of fragmentation,” she said. “Trade and investment flows are being redirected along geopolitical lines. … If fragmentation deepens, we could find ourselves in a new Cold War.”
The current trend of global economic fragmentation reflects the ongoing reshaping of global trade and economic rules, said Luo Zhenxing, an associate researcher of the Institute of American Studies at the Chinese Academy of Social Sciences.
In the past decades, the world has undergone a phase of hyper-globalization. It has caused an uneven distribution of benefits between nations and within them, and it has contributed to the current backlash against globalization, he said.
After years of increasing trade tensions and rising tariffs, China is no longer the largest trading partner of the United States, with Mexico having assumed that role. China’s share of US imports fell to 13 percent in the first half of 2023 from 22 percent in 2018.
About 3,000 trade-restrictive measures were imposed last year around the world — nearly three times the number imposed in 2019, Reuters reported.
Gopinath said the path forward will depend on policymakers, as trade fragmentation is much more costly now because “unlike the start of the Cold War when goods trade to GDP was 16 percent, now that ratio is 45 percent”.
Growing protectionism
“Now we are in an environment of growing protectionism with several countries turning inward,” she said.
“Trade is the main channel through which fragmentation could reshape the global economy. Imposing restrictions on trade would diminish the efficiency gains from specialization, limit economies of scale and reduce competition,” she added.
While Gopinath said that estimates of fragmentation costs vary widely, “in an extreme trade fragmentation scenario with limited ability of economies to adjust, losses could be as high as 7 percent of global GDP”.
Such fragmentation has potentially serious consequences that could outweigh greater domestic economic resiliency and security, she said.
“If not properly managed, the costs could easily overwhelm these benefits, and potentially reverse nearly three decades of peace, integration, and growth that helped lift billions out of poverty,” she added.
According to Luo, mishandling the fragmentation furthermore will lead to two parallel systems in trade, technology, and investment worldwide, and alter the global political landscape, increasing the risk of conflicts.
Gopinath noted that global fragmentation would make it difficult to meet common challenges like climate change and she called on countries to implement “pragmatic” approaches that preserve the benefits of free trade as much as possible.
A “green corridor” agreement could guarantee the international flow of minerals critical for the clean energy transition, she said, while similar agreements for essential food commodities and medical supplies could ensure minimum cross-border flows in an increasingly uncertain world.