Page 23 - bne monthly magazine June 2024 Russian Despair Index

bne June 2024 Companies & Markets I 23
“Policymakers are increasingly – and justifiably – focused on building economic resilience,” Gopinath says. However, she warned that if this trend persists, it could lead to a significant reversal in the benefits gained from globalisation in what is becoming an increasingly fractured world.
New trade restrictions have more than tripled since 2019, while financial sanctions have mushroomed. The geopolitical risk index spiked in 2022 following Russia's invasion of Ukraine. And concerns over fragmentation have surged among the private sector, evident in the increased mentions of the issue in corporate earnings calls.
Despite these trends, signs of deglobalisation aren't yet clear at an aggregate level, says Gopinath. Since the end of the hyper-globalisation era of the 1990s and early 2000s, the ratio of goods trade to global GDP has remained relatively stable at around 41-48%. However, fragmentation is evident beneath
“Although direct trade between geopolitical rivals has declined, some exchanges are now routed through third-party nations, partially offsetting the impact
of US-China decoupling.”
the surface, as trade and investment flows are redirected based on geopolitical allegiances rather than just profit. The share of international trade has remained roughly the same, but the routes it travels have drastically altered.
China’s share of US imports dropped by 8 percentage points from 2017 to 2023 amid heightened trade tensions, while the US share of China’s exports decreased by 4 percentage points during the same period. Meanwhile, direct trade between Russia and the West has collapsed following Russia's invasion of Ukraine but Russia’s trade with China has ballooned to more than $200bn a year of trade turnover.
Three Geopolitical Blocs
Gopinath examines the world through the lens of three geopolitical blocs: the US-leaning bloc, the China-leaning bloc, and a bloc of non-aligned nations, following on from a similar analysis by Capital Economics on the fractured world.
Between the second quarter of 2022 and the third quarter of 2023, trade growth between US-leaning and China-leaning nations was nearly 5 percentage points lower than in the preceding five years, whereas trade growth within each bloc only saw a modest 2-point decline.
Trade and FDI between opposing blocs have fallen by roughly 12% and 20% respectively, since Russia's invasion of Ukraine. This reallocation persists even when removing the US and China from the analysis.
Shadow Trade Networks
Although direct trade between geopolitical rivals has declined, some exchanges are now routed through third-party nations, partially offsetting the impact of US-China decoupling. Countries like Mexico and Vietnam have helped cushion the blow, while the strategic role of "connector" nations remains an open question in terms of supply chain resilience.
Going forward, policymakers face crucial decisions. They can either accept the rerouting of trade and FDI to maintain economic integration or continue raising barriers, further isolating politically distant nations.
Potential Costs of Fragmentation
An IMF study compares current trade fragmentation to the Cold War era, when trade between the Western and Eastern blocs was heavily restricted. Although current fragmentation isn't as severe as during that time, it's still a cause for concern, says Gopinath.
“Today's trade is far more interconnected, with the goods trade-to-GDP ratio at 45% compared to 16% at the start of the Cold War,” says Gopinath.
Fragmentation could stifle productivity gains from specialisation and limit the benefits of global supply chains. The costs of financial fragmentation include weaker risk- sharing and higher macroeconomic volatility. The rise of new payment systems could also hinder interoperability.
“Economic losses from fragmentation could range from 0.2% to 7% of global GDP, depending on the severity of restrictions. FDI losses could trim another 2% off global output,” says Gopinath. “Emerging and developing economies could bear the brunt of these disruptions, particularly those reliant on commodity imports and agricultural trade.”
Call for Cooperation
Gopinath called for a renewed commitment to international cooperation. She urged preserving the multilateral, rules-based trading system and maintaining open lines of communication. Areas of common interest, like climate change, digital
trade and cross-border payment systems, should serve as opportunities for collaboration, said Gopinath.
Rebuilding trust is challenging but vital to safeguarding the gains of global economic integration.
“It is well worth it to preserve some of the enormous gains from economic integration that have made the world more prosperous and more secure,” Gopinath concluded.
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