Ms Gopinath called on countries to defend the core principles of free trade. Photo: SUSANA VERA/REUTERS
The world is heading towards a “new Cold War” that risks “destroying” free trade as we know it, the deputy managing director of the International Monetary Fund (IMF) has warned.
Geeta Gopinath said “growing fault lines” in the global economy, such as tensions between the US and China and Russia's invasion of Ukraine, have led to permanent changes in the way countries do business.
Ms. Gopinath warned that the “cost of fragmentation” is higher than ever after decades of globalization. contributed to closer trade ties between countries.
Speaking at an economic forum in Colombia, Ms Gopinath warned that trillions of dollars would be lost if the global economy splits into two blocs – one dominated by the US and Europe in the West, and the other by China and Russia in the East.< /p >
This threatened to repeat the decades-long struggle for supremacy between the United States and the Soviet Union during the Cold War, which triggered the nuclear arms race.
Ms Gopinath said: “Fault lines and geo-economic fragmentation are increasingly a reality. If fragmentation deepens, we could find ourselves in a new Cold War.
“The economic costs of a Second Cold War could be large. The world has become much more integrated, and we face an unprecedented number of common problems that a fragmented world cannot solve.”
She called on countries to defend the core principles of free trade, warning that escalating global tensions could jeopardize net zero or food security.
Ms Gopinath said: “We can look to the prototypes of the last Cold War. During this period, the United States and the Soviet Union entered into several agreements to avoid nuclear disaster. Both superpowers subscribed to the doctrine of mutually assured destruction, knowing that an attack by one of them would ultimately lead to complete destruction.”
While a large-scale shift away from globalization remains unlikely, Ms Gopinath warned that the losses could be huge. up to 2.5-7% of global gross domestic product (GDP) if the world were to split into two trading blocs.
Direct trade links between the world's largest economies are already “breaking down”, she said.
Mexico replaced China as America's top trading partner earlier this year, and nearly 3,000 trade restrictions have been imposed worldwide in 2022—almost three times. this number was introduced in 2019.
Ms Gopinath said: “If we plunge into a second Cold War, knowing the cost, we may not see mutually assured economic destruction. But we could see the benefits of open trade eroding.
“Ultimately, policymakers should not lose sight of these gains. It is in their interests—and in everyone's interests—to advocate strongly for a rules-based multilateral trading system and the institutions that support it.”
Growing geopolitical tensions, the impact of restrictions during the pandemic and the war with Russia. with Ukraine caused a wave of protectionism in the world economy.
Russia’s war with Ukraine contributed to a wave of protectionism in the world economy. Photo: Paul Grover for The Telegraph
Ms Gopinath said: “The US is calling for 'support of friends', the EU for 'reducing risks' and China for 'reliance'. National security concerns shape economic policy around the world.”
She suggested that “industrial policies” such as President Joe Biden's US Inflation Reduction Act could lead to an increase in tit-for-tat policies that increase global tensions.
President Biden's major policies include almost $400 billion in subsidies and tax breaks for green projects and initiatives.
While Ms Gopinath did not mention any subsidy schemes by name, she said industrial policy should be “carefully assessed[d] … both in terms of its effectiveness in achieving its stated results and in terms of the associated economic costs, including cross-border spillovers.”
She added: “At home, industrial policies can be difficult to limit or reverse, given their concentrated benefits and diffuse costs. At the international level, such policies could lead to countermeasures that exacerbate fragmentation.”
The IMF estimates that once China imposes a subsidy, there is a 90% chance that the EU will impose retaliatory trade restrictions within 12 months.
It also made clear that the current system for resolving trade disputes around the world Trade Organization was no longer fit for purpose.
“The global rules-based system was not designed to resolve trade conflicts based on national security,” she said. “So we have countries competing strategically with amorphous rules and without an effective arbiter.”
Ms Gopinath warned that the stakes were higher than ever before amid weaker global growth.< /p>
>She said: “The degree of economic interdependence between countries is now greater as economies have become much more integrated into the global market and through complex global value chains.”
“World trade to GDP ratio is now 60% compared to last year. up to 24% during the Cold War. This will likely increase fragmentation costs. In short, anyone can lose.”
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