IMF "If US-China Trade Confrontation Continues, Global GDP Could Drop 7%"

US-China Rivalry Triples Trade Regulations in 3 Years
"Developing Countries Suffer... 'Connector' Nations Are Crucial"

As the battle for trade dominance between the United States and China intensifies, the International Monetary Fund (IMF) has warned that this confrontation threatens global trade cooperation and economic growth. It projected that if the conflict reaches its peak, the damage could amount to as much as 7% of the global gross domestic product (GDP).

On the 8th (local time), CNBC reported that Gita Gopinath, IMF Deputy Managing Director, stated, "An increasing number of countries are deciding whom to trade and invest with based on concerns about economic and national security."

Other Gopinath IMF Deputy Managing Director [Image source=AFP Yonhap News]

She said, "Countries are increasingly choosing sides between China and the United States. This is not necessarily bad, but if this trend continues, global trade rules will broadly regress, and the benefits gained from economic integration will be reversed."

Recently, tensions between the U.S. and China have escalated as the U.S. has strengthened trade sanctions against China citing national security concerns. Additionally, worries over China's advances in the South China Sea and disputes surrounding Taiwan are factors that are dampening international trade.

Deputy Managing Director Gopinath noted the significant increase in global trade regulations from 2022 to 2023. While there were about 1,000 trade regulations in 2019, this number has more than tripled in just three years.

Due to rising U.S.-China tensions, trade has decreased not only between the two countries but also between their respective blocs. Since the Russia-Ukraine war, trade between blocs has fallen by 12% compared to intra-bloc trade, and foreign direct investment has decreased by 20%. Countries aligned with the U.S. include Europe, Canada, Australia, and New Zealand, while those siding with China include Russia, Eritrea, Mali, Nicaragua, and Syria. Notably, China saw a 26% drop in foreign direct investment in the first quarter of this year compared to the same period last year amid heightened tensions with the West. Gopinath emphasized, "This pattern is not driven solely by the U.S. and China; it persists even excluding these two countries."

Gopinath believes that although the U.S.-China confrontation has not yet reached Cold War levels, the potential impact has grown as the global economy has become more trade-dependent. During the Cold War, the share of goods trade relative to global GDP was only 16%, whereas it now stands at 45%.

The IMF estimates that the economic cost of a peak trade conflict could reach up to 7% of global GDP, an amount comparable to the combined economic size of France and Germany. In the case of a mild division, the global GDP is expected to be hit by about 0.2%.

Gopinath explained, "Imposing trade restrictions reduces efficiency gains from specialization, limits economies of scale, and decreases competition," adding, "There are also costs arising from financial fragmentation." Trade's role in intra-industry redistribution and productivity improvement is suppressed, and foreign investment declines. Low-income countries that heavily depend on agricultural imports and overseas investment are particularly vulnerable to damage.

However, Gopinath assessed that despite the world economy being split into two, the ratio of goods trade to global GDP has remained stable over the past 20 years.

She attributed this to countries acting as "connectors." Neutral countries such as Mexico and Vietnam have mitigated the effects of division between the U.S. and China. Gopinath stated, "These non-aligned countries can play a greater role in maintaining global integration by leveraging their economic and diplomatic influence."

Gopinath emphasized, "We must keep communication channels open, engage in continuous dialogue, and cooperate on common interests. Harmful unilateral policy measures, including industrial policies, should be limited."

This content was produced with the assistance of AI translation services.