Summary
- IMF warns of 7% GDP loss from global trade fragmentation.
- Report cites factors such as invasion of Ukraine and COVID-19 as contributors.
- IMF recommends strengthening international trade system, helping vulnerable countries and stepping up climate action.
The International Monetary Fund (IMF) has released a report which states that fragmentation in global trade could lead to a loss of up to 7% of GDP for the global economy. This is a significant figure, considering that 7% of GDP is roughly the combined annual output of Germany and Japan. The report suggests that fragmentation has a long-term cost that varies from 0.2% of global output to almost 7%. However, the research does not state how long it would take for fragmentation to impact growth of this magnitude.
The IMF defines fragmentation as including a range of factors such as restrictions on cross-border migration, reduced capital flows, and a decline in international cooperation. However, depending on the definition of fragmentation, some forecasts by the IMF could be even bleaker. Estimates that include technological disconnect between regions suggest that countries could lose up to 12% of GDP.
The IMF lists several contributing factors to this increasing global fragmentation, including Russia's invasion of Ukraine and the COVID-19 pandemic. Both of these situations have caused international disruption to financial, food, and energy supplies, with additional trading restrictions adding to the discord between regions. The report states that “the risk is that policy interventions adopted in the name of economic or national security could have unintended consequences, or they could be used deliberately for economic gains at the expense of others.”
The IMF does not expect all countries to feel the impacts of fragmentation equally. Lower-income consumers in advanced economies would no longer have access to cheaper imported goods, according to the report, leaving small, open-market economies particularly vulnerable. The report states that “most of Asia would suffer due to its heavy reliance on open trade.” Additionally, emerging and developing economies would cease to benefit from “technology spillovers” from more advanced economies, which in the past have helped to boost growth and living standards. The report concludes that “instead of catching up to advanced economy income levels, the developing world would fall further behind.”
The IMF recommends three approaches to tackle this fragmentation: strengthening the international trade system, helping vulnerable countries to deal with debt, and stepping up climate action. These topics are likely to feature heavily in discussions at the World Economic Forum in Davos, Switzerland, starting Monday, which this year named “cooperation in a fragmented world” as its theme. Overall, the report serves as a stark warning that fragmentation in global trade could have severe economic consequences and highlights the importance of international cooperation to mitigate these risks.