US-China Trade Bloc Divisions Could Spell Trouble for Global Economy
The International Monetary Fund (IMF) has warned that the growing divide between the United States and China and their respective trade blocs could lead to a “reversal” for the global economy. According to IMF Deputy Managing Director Gita Gopinath, events such as the COVID-19 pandemic and Russia’s invasion of Ukraine have upended global trade relations to a degree not seen since the Cold War. This, in turn, threatens global trade cooperation and economic growth.
The trend toward economic fragmentation and the proliferation of trade restrictions have resulted in countries increasingly picking sides between the US and China, and the IMF has warned that the potential impact could be disastrous. The IMF estimates that in the event of extreme fragmentation, GDP could take a hit of up to 7%, while mild divisions could lead to a 0.2% decrease in GDP.
The US has ramped up trade restrictions and sanctions on China while expressing concerns over Beijing’s advancements in the South China Sea and rhetoric around Taiwan, while China has struggled to maintain foreign investment due to increased tensions with the West. Since the invasion of Ukraine, trade between the blocs has decreased, with a reported 12% drop in international trade and a 20% reduction in foreign direct investment flows.
While the IMF notes that the impact of economic fragmentation has been somewhat cushioned by non-aligned “connector” economies such as Mexico and Vietnam, united efforts and bridges must be created to reduce any impact on the global economy. If economic fragmentation continues, it could lead to a reversal of gains from economic integration, placing the burden on low-income countries who rely heavily on foreign investment and agricultural imports.
Overall, the IMF warns of the potential economic costs of divisions between the US-led Western bloc and China-aligned blocs, calling for further action to promote a rules-based global trading system.
Source article: https://www.cnbc.com/2024/05/08/us-and-china-trade-bloc-divisions-threaten-a-reversal-for-global-economy.html
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