The world economy is moving towards fragmentation

The world economy is on the verge of geo-economic fragmentation, experts from the International Monetary Fund (IMF) write in a study timed to coincide with the Davos forum. The main risks of deglobalization in the fund are associated with restrictions on trade in raw materials and high-tech goods – a complete halt in such flows between “unfriendly” countries can lead to a loss of up to 1.5% of global GDP. For developing countries, the negative consequences of the process are associated primarily with restrictions on technology transfer, for developed countries – with rising costs.

After decades of economic integration, the world is facing risks of geo-economic fragmentation caused by changing government policies, according to a special IMF report released ahead of the World Economic Forum in Davos. The authors count deglobalization from the moment of the global financial crisis of 2008–2009 and attribute Brexit, trade wars between the United States and China, as well as restrictions imposed during the pandemic and after the start of the Russian military operation in Ukraine to this process.

It is noted that the ratio of total exports to global GDP increased from the 1960s to the early 2010s, and then the period of “globalization at low rates” (slowbalization) began.

The global division of labor has increased its productivity, but supply chains have become more vulnerable, the extraction of many key resources has been concentrated in just a few countries, and production has shifted to China (the country accounts for 24% of industrial value added, while the US – 17%, the EU – sixteen%). The growing share of PRC production of intermediate goods has also led to a reduction in trade flows due to import substitution. Between 1990 and 2021, China’s trade with developed countries grew 31 times, while between developed countries it only quadrupled. The consequences of globalization have been lower transaction costs and consumer prices, faster adaptation of new technologies, convergence of income levels between countries, and a significant reduction in the overall level of poverty. One of the negative consequences was the increased stratification between skilled and unskilled workers.

So far, there are not many signs of fragmentation in world trade, the authors of the report point out, but the number of protectionist measures continues to grow – most often they affect the supply of high-tech goods.

A complete halt in trade in energy and high-tech goods between countries (if it was linked to their position on the military operation of the Russian Federation in Ukraine during the March vote at the UN) would mean a reduction in total GDP by 1.2%, if non-tariff restrictions were added, by 1.5%, IMF experts calculated.

Another component of fragmentation is prohibitions on foreign investment and mergers and acquisitions in certain sectors. For example, the law to reduce inflation in the United States provides for the allocation of large-scale benefits to national producers, which worsens the conditions for competition with foreign suppliers. Such restrictions threaten the prospect of a “global divergence”, which will negatively affect the global economy, the IMF notes. Companies, in turn, are increasingly thinking about the sustainability of supply chains and, including with an eye on government policy, choose “friendly directions” (such a policy is called friend-shoring).

The reduction in trade turnover in the world will have a negative impact primarily on developing countries and will lead to a decrease in their level of well-being, experts say, for these countries the main losses will be associated with restrictions on technology transfer. For developed countries, the transfer of production will reduce risks, but will lead to an increase in costs. Changes in supply chains can also lead to temporary supply shocks as they support rising commodity prices and inflation in general.

Tatyana Edovina