US-China trade divisions threaten global economic 'upset'

Chinese President Xi Jinping speaks at an event hosted by the National Committee for China-US Relations and the US-China Business Council on the sidelines of Asia-Pacific Economic Cooperation (APEC) Leaders' Week, in San Francisco, California, November 15. , 2023.

Carlos Barría | Afp | Getty Images

Differences between Western economic blocs led by the United States and aligned with China threaten global trade cooperation and economic growth, a senior International Monetary Fund official warned Tuesday.

IMF Deputy Managing Director Gita Gopinath said in a speech at Stanford University that events such as the global pandemic and Russia's invasion of Ukraine have disrupted global trade relations in a way never seen since the Cold War.

“Increasingly, countries around the world are guided by economic security and national security concerns when determining with whom they trade and invest,” she said, adding that this has led countries to increasingly choosing sides between China and the United States.

While building economic resilience is “not necessarily bad,” the trend toward fragmentation threatens a move away from a “rules-based global trading system” and a “significant reversal of the gains of economic integration.” , Gopinath said.

Tensions between Washington and Beijing have risen as the United States steps up trade restrictions and sanctions against China, citing national security concerns, while concerns over Beijing's advances in the South China Sea and rhetoric around Taiwan have also soured sentiment.

The growing tension between the world's two largest economies has been reflected globally, with more than 3,000 trade restrictions imposed by countries around the world in 2022 and 2023, more than triple from 2019, according to data compiled by the IMF.

Trade between the Chinese and US blocs has declined compared to trade between countries within the groupings, Gopinath said. The US bloc mainly includes Europe, Canada, Australia and New Zealand, while Chinese-leaning countries include Russia, Eritrea, Mali, Nicaragua and Syria.

Since the invasion of Ukraine, trade between the blocs has fallen by around 12% and foreign direct investment is down 20% compared to that within the bloc's constituents.

China, in particular, has struggled to maintain foreign investment amid growing tensions with the West. Foreign direct investment flows into the country are estimated to have fallen by 26% in the first three months of 2024 compared to the same period a year earlier.

Future impact

Although economic fragmentation has not yet reached the same levels as the Cold War, its potential impact is much greater due to the global economy's greater reliance on trade, according to Gopinath.

If the divisions are not overcome, the IMF estimates that the economic costs on global GDP could reach 7% in the extreme fragmentation scenario. GDP will be affected by around 0.2% in the event of slight divisions.

Low-income countries will likely be hardest hit due to their greater dependence on agricultural imports and foreign investment from more advanced economies, according to the IMF.

However, despite fragmentation trends in the global economy, the ratio of total merchandise trade to global GDP has remained relatively stable over the past two decades, Gopinath said.

One reason is that the impact of fragmentation has been mitigated by a group of countries neutral to the United States and China, such as Mexico and Vietnam, which act as “connector” economies across which trade and investment can be redirected.

By using their “economic and diplomatic clout,” these non-aligned countries can play a greater role in maintaining global integration, Gopinath said.

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