IMF Warns Unraveling Economic Ties Could Shrink Global Output
Lender points to rising trade, migration and investment barriers
Declining international cooperation and commerce could shrink the global economy, particularly harming low-income countries, the International Monetary Fund said in a new study.
The report cited several ways that government policies are driving a reversal of global economic integration, such as by restrictions on trade, immigration and cross-border capital flows. The authors labeled this process geoeconomic fragmentation and warned it could lower global gross domestic product by up to 7% over an unspecified “long-term” period.
If technology sharing is also restricted, the losses would be even greater, from 8% to 12%, in some, mostly lower-income and emerging economies, said the staff report, released Sunday.
This could undo the economic globalization of recent decades that the IMF said has reduced poverty in developing countries and delivered lower prices to low-income consumers in advanced economies.
“The global economy may be on the brink of a reversal of the steady increase in integration that characterized the second half of the 20th century,” the multilateral lender said in its analysis. “While fragmentation may entail strategic advantages for some countries in selected cases, it is very likely to involve significant economic costs in the aggregate.”
The costs “would include higher import prices, segmented markets, diminished access to technology and to both skilled and unskilled labor, and ultimately reduced productivity which may result in lower living standards,” the IMF said.
The IMF concluded that the Covid-19 pandemic and Russia’s invasion of Ukraine further strained trade ties that were tested by a shallow and uneven recovery from the 2008 financial crisis as well as the U.K.’s exit from the European Union and continuing trade tensions between Washington and Beijing.
The IMF noted that at the height of the pandemic, countries limited their exports of medical goods and foodstuffs with export bans that accounted for about 90% of trade restrictions.
Moreover, the war in Ukraine and associated sanctions placed by the West on Russia and Belarus led to “major dislocations in energy and agricultural commodity markets.”
The lMF said that the U.S., European Union and China had all enacted recent measures to promote domestic high-tech production. Companies, too, were moving their supply chains to minimize risk, with key words such as “reshoring,” “near-shoring” and “onshoring” appearing more frequently in company earnings calls and reports, the IMF said.
This trend toward fragmentation in trade would likely reduce opportunities for emerging economies and slow the reduction of poverty, according to the IMF.
Rising barriers to the flow of labor across borders could also slow down innovation and technological diffusion, the IMF said. Economic fragmentation could also constrict options for international investing, which would hinder development. The trends are likely to lead to uncertainty and to make cooperation on challenges such as climate change more difficult, the lender said.
Fragmentation is likely to contribute to splintered regulation, making some forms of international banking untenable and raising the cost of financing, according to the IMF. Countries that wanted to preserve stability would likely have to rely on “costly self-insurance” such as reducing external debt to bolster themselves against shocks.
The IMF recommends ensuring trade cooperation on global public goods and fair competition, while protecting the most vulnerable populations. Further, the lender recommends preserving minimal cooperation through what it calls guardrails, for example, “safe corridors” to enable the movement of critical goods and services.
It also recommends that countries try to achieve a small number of common goals in areas where they have broad alignment. “Open a path for rebuilding trust,” the IMF said. One such area could be a new digital international payment system.
The report comes amid multiple signs that the global economy slowed toward the end of 2022 under the weight of high inflation and rising interest rates, combined with challenges caused by the war in Ukraine and effects of Covid-19 in China.
The World Bank earlier this month sharply lowered its forecast for global economic growth in 2023 and noted an elevated risk of a worldwide recession. The bank expects growth to slow to 1.7% in 2023, down from an estimate of 3% growth in June. That would mark the third-weakest pace of global growth in nearly three decades, overshadowed only by the 2009 and 2020 downturns, according to the World Bank.