WASHINGTON - Growing geopolitical fragmentation around the world, including the US-China trade war and the Russian invasion of Ukraine, could cut global output by two percent over the long run, the International Monetary Fund said.
Research by the IMF found that growing geopolitical tensions were causing a reallocation of foreign direct investment (FDI) away from countries that were geographically close and towards those that were geopolitically close, like the United States and Europe.
This reallocation of FDI has the potential to cause serious damage to emerging market economies, the IMF said, since they are more reliant on inflows of investment from more geopolitically distant countries.
"In general, a fragmented world is likely to be a poorer one," IMF officials wrote in a blog post published Wednesday to accompany the research.
Policymakers "should carefully balance the strategic motivations behind reshoring and friend-shoring against economic costs to their own economies and the spillovers to others," the IMF officials wrote, adding that it was "crucial" to try and foster greater global integration.
The IMF also published research on Wednesday outlining the impact to the banking sector of geopolitical fragmentation, highlighting the cost to Russia and its allies of the 2022 invasion of Ukraine.
"Cross-border banking and portfolio debt flows to Russia and its allies (countries that rejected the motion in the United Nations in March 2022 to condemn Russia’s war on Ukraine) have reversed sharply, with allocations falling by about 20 and 60 percent relative to prewar levels, respectively," IMF officials wrote in a blog post.
The report found that rising tensions between investing and recipient countries like the United States and China had reduced the overall bilateral cross-border allocation of portfolio investment and bank claims by around 15 percent.