IMF - Geoeconomic Fragmentation, Jan 2023

The world is facing the risk of fragmentation as a result of shallow and uneven recovery from the global financial crisis, Brexit, U.S.–-China trade tensions, and a growing number of military conflicts. The post-GFC era has seen a leveling-off of global flows of goods and capital, and a surge in trade restrictions. The COVID-19 pandemic and Russia’s invasion of Ukraine have further tested international relations and increased skepticism about the benefits of globalization. This staff discussion note explores the potential economic ramifications of a policy-driven reversal of global economic integration, a multidimensional process that the authors refer to as geoeconomic fragmentation (GEF). The benefits of globalization propagate through multiple channels; the adverse consequences of GEF would be felt in many areas as well. The unraveling of trade links would most adversely impact low-income countries and less well-off consumers in advanced economies. Restrictions on cross-border migration would deprive host economies of valuable skills while reducing remittances in migrant-sending economies. Reduced capital flows would hinder financial deepening in destination countries. And a decline in international cooperation would put at risk the provision of vital global public goods. To avert runaway fragmentation, the rules-based multilateral system must adapt to the changing world. This includes the international trade and monetary systems.