The costs of geoeconomic fragmentation
In this commentary, Aiyar et al. explore the potential economic ramifications of a policy-driven reversal of global economic integration, they refer to as geoeconomic fragmentation (GEF).
Data from the Global Trade Alert database shows that trade restrictions imposed by countries, notably in high-tech sectors mostly linked to national security or strategic competition, are rising. In addition, companies are focusing on resilience of supply-chains and considering reshoring or friend-shoring to cope with risks.
The authors review recent literature about the economic costs of GEF and conclude:
- The unraveling of trade links would most adversely impact low-income countries and less well-off consumers in advanced economies;
- Reduced capital flows would hinder financial deepening in destination countries, especially through foreign direct investment which can be an important source of technological diffusion;
- Technological decoupling significantly amplifies losses from trade restrictions: the cost to global output from trade fragmentation could range from 0.2 percent to up to 7 percent of GDP but with the addition of technological decoupling, the loss in output could reach 8 to 12 percent in some countries;
- Financial globalization could give way to “financial regionalization” and a fragmented global payment system. With less international risk-sharing, GEF could lead to higher macroeconomic volatility, more severe crises, and greater pressures on national buffers.
Geoeconomic Fragmentation and the Future of Multilateralism
Authors: Shekhar Aiyar, Jiaqian Chen, Christian Ebeke, Roberto Garcia-Saltos, Tryggvi Gudmundsson,
Anna Ilyina, Alvar Kangur, Tansaya Kunaratskul, Sergio Rodriguez, Michele Ruta, Tatjana Schulze,
Gabriel Soderberg, Juan Pedro Trevino
From: IMF
Focusing on the effects of technological decoupling
In this paper, Góes and Bekkers analyze the impact of reduced technology and know-how spillovers due to GEF. They build a multi-sector multi-region general equilibrium model with dynamic sector-specific knowledge diffusion: when domestic producers import intermediate inputs, they gain access to new sources of ideas, whose quality depends on the productivity of the countries and sectors from which they source intermediates. They confirm the Aiyar et al. estimates of a 12 percent output reduction especially in the lower income regions. In addition:
[I]f geopolitical considerations would lead to a split of the big players into two blocs, it would be important that an institutional framework remains in place for smaller countries to keep open trade relations with both blocs, in particular for the lowest income regions.
The Impact of Geopolitical Conflicts on Trade, Growth, and Innovation
Authors: Carlos Góes, Eddy Bekkers
From: UC San Diego, World Trade Organization
