## Cold War II? Preserving Economic Cooperation Amid Geoeconomic Fragmentation

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### Overview
- Presentation date: DECEMBER 11, 2023
- Event: 20TH WORLD CONGRESS OF THE INTERNATIONAL ECONOMIC ASSOCIATION
- Speaker: Gita Gopinath, First Deputy Managing Director, International Monetary Fund
- Central thesis: The threat of "Cold War II" is weighing on an already challenging outlook, with rising geopolitical risk and fragmentation affecting trade, investment, and growth.

### An unfavorable outlook — key statistics
- Medium-term growth forecast (percent): charted for 2000, 2005, 2010, 2015, 2020, with 2023 using October vintage; 2000-2022 use April World Economic Outlook vintages (exact numerical forecast points are in the source charts).
- Scarring (percent, real GDP deviation in 2023 from prepandemic projections): 2023 values plotted for USA, EA, World, China, EMDE, LIDC with example axis showing range from -7 to 1; specific displayed marker: -7 to 0 to 1 scale (exact country deviations available in charts).
- Note: "Prepandemic projections" refers to those in the January 2020 World Economic Outlook Update. AE=advanced economies, EA=euro area; EMDE=emerging market and developing economies; LIDC=low income developing countries.

### #1. Some historical perspective
- Not the first time globalization under threat: historical series from 1860 to 2000 and segmented periods labeled 1980–2008 Globalization, 2008-2021 Slowbalization, and 1939-1991 World War II and the Cold War.
- During the Cold War, trade-to-GDP rose but trade was heavily shaped by geopolitical considerations.
- Goods trade between blocs (percent of total trade, right axis) and Global trade-to-GDP ratio (percent, left axis) are plotted across 1860–2000.

### Rising geopolitical risk and fragmentation
- Fragmentation keyword index in earnings calls (index, 2013-15=100): charted 2009–2023 Q3, Oct. 2023; axis shows 0–500 range and increasing trend (exact index values in the source chart).
- Measures distorting trade and investment (number): charted 2009–2022 with counts up to 3,000 (exact counts shown in source charts).
- Sources for indices: Caldara and Iacoviello(2022); Hassan and others (2019); NL Analytics, Inc.; Global Trade Alert database; and IMF staff calculations.

### #2. Growing fault lines
- Greater integration and uncertainty in ideology:
  - Change in government ideology over time (percent): chart compares Cold War, 1947-1991 with Post Cold War, 1992-2020; average share per year axis 0.00 to 0.10.
  - Global trade-to-GDP ratio: Cold War, 1947-1991 vs 2022 shown with axis 0–70 percent.
- Non-aligned countries now have greater economic heft and integration with rival blocs:
  - Trade between, within blocs and with non-aligned (share of total trade): charts comparing Cold War vs Cold War II with share breakdowns including values such as 49, 37, 10, 11, 41, 51 as displayed in source figures.
  - Relative bloc size (share of total population) during the Cold War and currently: charts showing 31%, 21%, 46% and 66% as presented.
- Emerging fault lines in trade and FDI:
  - Change in trade growth postwar (percentage points) and Change in FDI shares post war (percentage points): axes and bar charts show values within range -6 to +6 (exact country/group values in the charts).
  - Note on methodology: bilateral quarterly growth rates computed as difference in log bilateral trade, aggregated using bilateral nominal trade weights. FDI change measured as share of total number of FDI comparing 2022Q2-2023Q2 vs 2018Q1-2022Q1.
- Severing direct links with China:
  - US imports and US FDI: time series plotted 2012–2023 showing China losing ground as a source of US imports and destination for US investment; axis and series include China, Asia 13, Mexico for imports and China, India, Mexico, United Arab Emirates for FDI (4-quarter moving average; exact plotted values in source).
  - Change in US imports share vs FDI from China: scatter plots with country labels (examples shown: CAN, DEU, FRA, GBR, IND, ITA, JPN, KOR, MEX, TWN, VNM) and axes ranged -2.0 to 3.0 percentage point for changes in US imports share and -2.0 to 2.5 for changes in Chinese FDI share.
  - Change in US import shares vs Chinese export shares: similar scatter with axis -2.0 to 1.5 percentage point.
- Lengthening supply chains:
  - Distance by location of supplier (number): 2021 vs 2023 plotted with values from 8.0 to 11.0 showing trade flows making additional stops, especially those from China to the US.
  - Source: Qiu, Shin and Zhang (2023). “Mapping the realignment of global value chains.” BIS Bulletin No. 78.

### #3. The costs of fragmentation
- Channels of transmission highlighted:
  - Trade restrictions imply less economies of scale, reduced efficiency gains from specialization, reduced resource reallocation, reduced technological diffusion, and less competition.
  - Fragmented commodities trade could make the green energy transition harder.
  - Capital flow restrictions (FDI, portfolio and bank flows) may lead to lower capital accumulation and increased risks and macro volatility.
  - Barriers to labor flows could hinder innovation and worsen demographic trends.
  - Near-term effects: temporary adjustments, price pressures and supply shortages.
  - Longer-term: global cooperation becomes harder to tackle challenges transcending geopolitical blocs.
- Fragmentation costs could be large:
  - Trade fragmentation: impact on GDP (density of percent deviation from baseline by country groups) plotted with axis 0.0–0.5 and deviation range –15 to 5 percent for Advanced Economies, Emerging Markets, Low Income Countries (exact distributions in source charts).
  - FDI fragmentation: impact on GDP (percent deviation of no-fragmentation scenario) plotted with values ranging -7 to 0 across regional/group aggregates including US, EU+, CHN, SE Asia, ROW, IND, IDN, LAC and World; aggregated into US bloc, China bloc, Nonaligned in right chart.
  - Sources: Bolhuis, Chen, and Kett (2023); Chapter 3 of the October 2023 World Economic Outlook; Chapter 4 of the April 2023 World Economic Outlook; and IMF staff calculations.
  - Note: In the FDI chart, country-level losses are aggregated using weights based on GDP at purchasing power parity. Output losses could be particularly severe for emerging market and developing economies.

### Non-alignment and scenario simulations
- Trade model simulations: alternative scenarios show percent deviation of GDP from baseline under different bloc structures:
  - 2-bloc case: USA/EUR+ vs CHN/RUS+; allocation based on UN vote on Russia’s invasion of Ukraine (per Chapter 3 of October 2023 WEO).
  - 3-bloc case: USA/EUR, CHN/RUS, and non-aligned, with all trade between China/Russia and USA/EUR eliminated while remaining countries continue to trade with all.
- Results (illustrative from charts):
  - Non-aligned economies could cushion the negative effects of fragmentation and benefit in some cases.
  - Aggregated chart axis shows outcomes in range -5 to +1 percent deviation with labels such as USA/EURCHN/RUS, USA/EUR leaning, CHN/RUS leaning under 2-bloc and 3-bloc setups (exact scenario outcomes are in source charts).
- Note: Country-level losses aggregated using PPP GDP weights. In the 3-bloc scenario, all trade between China/Russia and USA/EUR is eliminated while remaining countries continue to trade with all.

### #4. Three principles for policy action
- Principle 1: Seek a multilateral approach for areas of common interest (e.g. climate change, regulation of new technologies).
- Principle 2: Deploy a plurilateral approach that deepens economic ties with a broad set of partners and targets only a narrow set of products and technologies on economic security grounds (e.g. RTA, JSI).
- Principle 3: Restrict the use of time-bound unilateral policy actions (e.g. IP) to address externalities and market distortions.
- Objective: To minimize fragmentation costs, achieve national objectives and tackle global challenges.

_International Monetary Fund — Cold War II? Preserving Economic Cooperation Amid Geoeconomic Fragmentation (DECEMBER 11, 2023), presentation by Gita Gopinath_

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_Source: https://www.imf.org/-/media/files/news/speech/2023/iea-presentation-final.pdf_