WASHINGTON (Reuters) - The International Monetary Fund's No. 2 official on Monday warned that fragmentation in the global economy and clear shifts in underlying bilateral trade could trigger a "new Cold War" given the conflict in Ukraine and U.S.-China tensions.
IMF First Deputy Managing Director Gita Gopinath told the International Economic Association in Medellin, Colombia, that losses could reach 2.5% to 7% of global gross domestic product if the world economy fragmented into two blocs, seen as predominantly the U.S. and Europe in the West and China and Russia in the East.
"While there are no signs of broad-based retreat from globalization, fault lines are emerging as geoeconomic fragmentation is increasingly a reality," she said. "If fragmentation deepens, we could find ourselves in a new Cold War."
The impact of the COVID-19 pandemic, which gummed up the transport of goods, particularly from China, as well as the effect of Russia's invasion of Ukraine, which caused a spike in energy and commodities prices, have caused governments to shift their focus to protecting themselves by producing more domestically or "friend-shoring" to other countries with which they share more stable relationships.
After years of increasing trade tensions and rising tariffs, China is no longer the largest U.S. trading partner, 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.
Around 3,000 trade-restrictive measures were imposed last year around the world - nearly three times the number imposed in 2019.
Such fragmentation has potential serious consequences that could outweigh greater domestic economic resiliency and security, Gopinath 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.
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.
"Such agreements would safeguard the global goals of averting climate change devastation, food insecurity and pandemic-related humanitarian disaster," Gopinath said.
She said any restriction of imports on national security grounds should be narrow and that countries should assess whether there is truly a lack of suppliers from less risky regions, particularly for widely used technologies such as semi-conductors, before deciding to bring production home.