Signs of fragmentation in the global economy and “meaningful shifts” in bilateral trading relations could mark the beginnings of a “new cold war”, according to International Monetary Fund (IMF) first managing deputy director Gita Gopinath.
Ms Gopinath warned that a potential fragmentation of the world into two blocs – predominantly the US and Europe in the West and China and Russia in the East – could come at an estimated cost of approximately 2.5 per cent of global GDP.
“But depending on economies’ ability to adjust, the losses could reach as high as 7 per cent of GDP,” she told the 20th World Congress of the International Economic Association in Colombia on Monday (11 December), local time.
“While there are no signs of broad-based retreat from globalisation, fault lines are emerging as geoeconomic fragmentation is increasingly a reality. If fragmentation deepens, we could find ourselves in a new Cold War.”
According to Ms Gopinath, the COVID-19 pandemic, conflicts and increasing tensions between the world’s largest economies – the US and China – have “undoubtedly changed” the playbook for global economic relations.
“The US calls for ‘friend-shoring’, the EU for ‘de-risking’, and China for ‘self-reliance.’ National security concerns are shaping economic policy worldwide,” she said.
“Meanwhile, the global rules-based system was not built to resolve national security-based trade conflicts. So, we have countries strategically competing with amorphous rules and without an effective referee.”
In this environment, Ms Gopinath said that countries stand to benefit as they de-risk their supply chains and strengthen their national security.
“But, 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.
“With the weakest global growth prospects in decades – and with disproportionate scarring from the pandemic and war slowing income convergence between rich and poor nations – we can little afford another Cold War.”
“If we descend into Cold War II, knowing the costs, we may not see mutually assured economic destruction. But we could see an annihilation of the gains from open trade,” Ms Gopinath suggested.
“Ultimately, policymakers must not lose sight of those gains. It is in their – and everyone’s – best interest to advocate strongly for a multilateral rules-based trading system and the institutions that support it.”
Ms Gopinath called on global policymakers to focus on pragmatic approaches that preserve the benefits of free trade while achieving domestic goals of security and resilience.
“Keeping open the lines of communication, as is being done by the US, China and EU, can help prevent the worst outcomes from occurring,” she concluded.
“The non-aligned countries, which are mainly emerging and developing countries, can deploy their economic and diplomatic heft to keep the world integrated. After all, many emerging and developing countries face the biggest losses from a fragmented world, and while some benefit in the early stages of fragmentation, all lose in a full-blown Cold War.”
Jon Bragg
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.
