Trade fragmentation could cost global economy up to 7% of GDP: IMF

The note, titled ‘Geoeconomic Fragmentation and the Future of Multilateralism’, explores the potential economic ramifications of a policy-driven reversal of global economic integration, a multidimensional process that the authors at IMF refer to as geo-economic fragmentation (GEF).

With the addition of technological decoupling, the loss in output could reach 8 to 12 per cent in some countries, IMF said.

The benefits of globalisation propagate through multiple channels; the adverse consequences of GEF would be felt in many areas as well, it noted.

Estimates of the costs of GEF from economic modeling vary widely. Available studies suggest that the deeper the fragmentation, the deeper the costs; that technological decoupling significantly amplifies losses from trade restrictions; that adjustment costs are likely to be large; and that emerging market economies and low-income countries are likely to be most at risk due to the loss of knowledge spillovers, the note said.

GEF could strain the international monetary system and the global financial safety net (GFSN). Financial globalisation could give way to ‘financial regionalisation’ and a fragmented global payment system, the IMF authors commented.

With less international risk-sharing, GEF could lead to higher macroeconomic volatility, more severe crises, and greater pressures on national buffers.

Facing fragmentation risks, countries may look to diversify away from traditional reserve assets—a process that could be accelerated by digitalisation—potentially leading to higher financial volatility, at least during transition, they wrote.

By hampering international cooperation, GEF could also weaken the capacity of the GFSN to support crisis countries and complicate the resolution of future sovereign debt crises, the IMF note added.

Fibre2Fashion News Desk (DS)