The world economy risks descending into a second Cold War that wipes out the benefits of three decades of peace and growth, a senior official at the International Monetary Fund (IMF) has warned.
Gita Gopinath, the IMF’s second in command, said the fragmentation of nations into competing power blocs threatened ‘an annihilation of the gains from open trade’.
Today the rivalry is not between the US and the Soviet Union but the US and China.
And the world is at a ‘turning point’, Gopinath said.
She told a conference in Colombia that as much as 7 per cent of global GDP – or trillions of dollars – could be lost if the world economy breaks down into two blocs, with the US and Europe on one side and China and Russia on the other.
Fears: Gita Gopinath (pictured), the IMF’s second in command, said the fragmentation of nations into competing power blocs threatened ‘an annihilation of the gains from open trade’
‘While there are no signs of broad-based retreat from globalisation, fault lines are emerging as geoeconomic fragmentation is increasingly a reality,’ she said. ‘If fragmentation deepens, we could find ourselves in a new Cold War.’
The comments from one of the world economy’s most senior power brokers underlines the extent of alarm at growing tensions between Washington and Beijing.
Those tensions have intensified in the wake of Russia’s invasion of Ukraine, which has already precipitated a slowdown in global trade.
Governments in the US and Europe are splashing out hundreds of billions protecting their own industries from foreign competition.
Years of rising tensions and tariff barriers have meant that China is no longer America’s largest trading partner.
Its share of US imports has fallen from 22 per cent in 2018 to 13 per cent in the first half of 2022.
That process intensified under Donald Trump, who was not mentioned in Gopinath’s speech but whose potential return to the White House in 2025 would be likely to reignite fears of worsening global relations.
Gopinath said that over the past five years ‘threats to the free flow of capital and goods have intensified as geopolitical risks have grown’.
Around 3,000 ‘trade restricting’ measures were imposed last year, she said, nearly three times the number seen in 2019.
She said: ‘If we descend into Cold War II, knowing the costs, we may not see mutually assured economic destruction, but we could see an annihilation of the gains from open trade.’
Gopinath acknowledged the arguments against globalisation that have helped bolster calls for inward-looking policies.
‘Of course, economic integration has not benefited everyone,’ she said. ‘But it has helped billions of people become wealthier, healthier and better educated. Since the end of the Cold War, nearly 1.5bn people were lifted out of extreme poverty.’
Gopinath said the tensions between the US and China as well as war and the pandemic had ‘changed the playbook for global economic relations’.
