How geopolitical fragmentation impacts economic globalization?

International Monetary Fund (IMF) Managing Director Gita Gopinath´s speech at the Stanford Institute for Economic Policy Research analyzing the impact of geopolitical tensions and fragmentation in the economic globalization, and how the reshaping of trading partners, foreign direct investments (FDI) flows and global trade restrictions, due to national security concerns and economic resilience, could retreat the gains from economic integration achieved in previous decades.

Main highlights:

• There are not yet clear signs of deglobalization at the aggregate level: According to the IMF, the ratio of goods trade to GDP has been roughly stable, fluctuating between 41 and 48 percent since the last global financial crisis.
  
  
• However, there are increasing signs of fragmentation as trade and investment flows are being redirected along geopolitical lines: The article considers a world divided into three blocs: a U.S. leaning bloc, a China leaning bloc, and a bloc of nonaligned countries. In summary, trade between blocs would have decreased since the invasion of Ukraine at a rate up to 20 percent greater than trade within the countries of each bloc.
  
  
• The emergence of “connector countries” has avoided a bigger impact on global trade. Some trade and investment are being re-routed through third-party countries, partially offsetting the erosion of direct links between the U.S. and China. For example, since 2017, greater Chinese presence in a country—measured either through exports or announced greenfield investment—has been associated with increased exports of that country to the U.S. In this regard, Mexico and Vietnam are cited as an example of countries that may have helped cushion the global economic impact of the commercial war between the U.S. and China. The article highlights the role of non-aligned countries as potential connectors that help cushion the effects of economic fragmentation.
  
  
• The cost of deglobalization will be greater than during the “Cold War.” Trade fragmentation would be much more costly this time around because unlike the start of the Cold War when goods trade to GDP was 16 percent, now that ratio is 45 percent. If global trade and financial fragmentation deepens, it could reduce efficiency gains from specialization, competition and knowledge diffusion, limit economies of scale, cross border capital flows. Additionally, efforts to tackle global challenges such as climate change and AI could be impeded (e.g. higher cost of critical minerals for renewable energy).