May 11, 2024 - Economy

IMF's Gopinath warns on fragmenting global trade, economic fallout

Illustration of a pile of jenga blocks with the colors and stars of the U.S. and Chinese flags

Illustration: Sarah Grillo/Axios

Widening geopolitical divides are disrupting global trade flows, creating spillover effects that are dividing the world's economies into competing blocs, a top International Monetary Fund official warned this week.

Driving the news: At a speech at Stanford University on Tuesday, IMF First Deputy Managing Director Gita Gopinath said that global economic ties are shifting in ways that have not been seen since the Cold War's conclusion.

  • Induced shocks like the COVID-19 pandemic and the Russia-Ukraine conflict are prompting more countries to rethink economic ties based on national security and protectionist concerns.
  • That also means "foreign direct investment flows are also being re-directed along geopolitical lines," Gopinath added. "Some countries are reevaluating their heavy reliance on the dollar in their international transactions and reserve holdings."

Why it matters: Growing U.S.- China disputes are a threat to global trade, and may prompt other countries to choose sides, or get caught in the crossfire. Gopinath warned the dynamic is leading to the emergence of three separate economic blocs: China-leaning, U.S.-leaning and non-aligned.

Zoom out: The U.S. dollar remains the world's dominant reserve currency, and has been perched at historically strong levels as the Federal Reserve battles inflation with higher interest rates. Yet some countries are reducing their reliance on the greenback in international transactions and reserves.

  • Gopinath cited a marked increase in gold purchases by central banks during 2022-23, driven by concerns over sanctions risk, especially by China bloc countries.

What she's saying: "All of this is not necessarily bad. Given the recent history of events, policymakers are increasingly—and justifiably—focused on building economic resilience," the economist stated.

  • Despite these trends, there are not yet clear signs of deglobalization at the aggregate level," Gopinath said. "But under the surface, there are increasing signs of fragmentation. Trade and investment flows are being redirected along geopolitical lines."
  • Should these trends continue, "we could see a broad retreat from global rules of engagement and, with it, a significant reversal of the gains from economic integration."

Zoom in: The U.S.-led bloc primarily includes Europe, Canada, Australia, and New Zealand. Meanwhile, China-leaning countries are seen including Russia, Eritrea, Mali, Nicaragua, and Syria; non-aligned countries like Mexico and Vietnam.

By the numbers: IMF data shows declining trade between the three groups.

  • New trade restrictions have tripled since 2019, with expanded financial sanctions amidst growing trade tensions between the U.S. and China.
  • While the U.S. dollar facilitated over 80% of trade finance transactions, the China-leaning bloc has been slowly shifting toward the use of the yuan.
  • In fact, dollar-denominated transactions have dipped since 2022, while China's renminbi (RMB) use doubled, from 4% to 8%, during the same period.

Bottom line: If current tensions persist, the IMF estimates the economic costs could mount. In the most benign estimates, it could shave anywhere between 0.2% to 7% from global growth.

  • "Dialogue between the US and China – which we are now seeing – can help prevent the worst outcomes from occurring," Gopinath said. "The second pragmatic step is to work together on areas of common interest."
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