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International Monetary Fund managing director Kristalina Georgieva (right) speaks to Ivorian Minister of Economy and Finance Adama Coulibaly during the curtain-raising ceremony of the annual meetings of the IMF and World Bank in Abidjan, Ivory Coast, on October 5. The annual meetings of the two institutions will be held in Marrakech, Morocco, from October 9 to 15. Photo: EPA-EFE
Opinion
Inside Out
by David Dodwell
Inside Out
by David Dodwell

Fragmenting global economy a real and present danger

  • At a time of increasing and interconnected crises, leading economists are warning that trade fragmentation threatens to further undermine growth prospects
  • Sadly, they are whistling in the wind as powerful countries continue to dig deeper protectionist trenches
David Dodwell
David Dodwell
Why you can trust SCMP

If “decoupling” and “de-risking” were the buzzwords of 2022, then a clear contender for 2023 is “fragmentation”.

As Russia’s invasion of Ukraine drags on, the threat of global warming grows, and inflation – driven by key commodities such as oil, gas and food – continues to erode economic recovery from the Covid-19 pandemic, so the angst among leading economic institutions over a damaging fragmentation of the global economy rises by the month.
International Monetary Fund managing director Kristalina Georgieva, setting the scene for the IMF/World Bank meetings to be held this week in Marrakech, Morocco, has warned that many countries are today “increasingly marching to their own tune” and that “economic fragmentation threatens to further undermine growth prospects”.

In August, IMF economists estimated that rising trade restrictions could reduce global economic output by 7 per cent, or about US$7.4 trillion in today’s dollars. “A fragmented global economy is likely to be a poorer one,” they said. After successive shocks during the past three years that have already cost the global economy about US$3.6 trillion, the IMF’s message is clear: we cannot afford deeper divergence, and we must return urgently to multilateral cooperation.

Last week, the World Trade Organization (WTO) joined the fray. In the words of its director general, Ngozi Okonjo-Iweala: “Global economic fragmentation would only make challenges worse … The global economy, and in particular poor countries, will struggle to recover without a stable, open, predictable, rules-based and fair multilateral trading system.”
World Trade Organization director general Ngozi Okonjo-Iweala shares a light moment with Indian Prime Minister Narendra Modi ahead of the Group of 20 Leaders’ Summit in New Delhi on September 9. Photo: AFP
Given that the October update of its Global Trade Outlook reported a slump in merchandise trade worldwide since the final quarter of 2022 and a halving of its 2023 trade growth forecast from 1.7 per cent to 0.8 per cent, the WTO is seeing clear warning signs of fragmentation.
Examining trade in intermediate goods – the exports that are not going to consumers in a final destination market but to the next country along a global supply chain – as a proxy for global economic integration, it found that intermediates accounted for just 48.5 per cent of global trade in the first half of 2023 – down from an average of 51 per cent during the past three years. Here is clear evidence that supply chains are being shortened and simplified.
On the brighter side, though, the WTO report also said that the measures enacted as part of the China-US trade conflict “have sparked some changes in international trading patterns, but evidence that they have thrown globalisation into reverse remains limited”.

Asia’s share of bilateral trade in intermediate goods with the US stands at 38 per cent – down from 43 per cent in the first half of last year but virtually unchanged from 39 per cent in 2019, before the pandemic. China’s share of US trade stands at 11 per cent – essentially unchanged from 2019 levels, despite the hopes of many politicians in the US Congress.

In reality, now is as difficult a moment to detect or interpret global trade and investment trends as any in the past three decades. It takes a brave economist to discern whether the changes in trade patterns are because of fragmentation and decoupling, the bumpy recovery from three years of pandemic upheaval – or the spike in inflation in the past four years that sees oil prices up 38 per cent since 2019, natural gas prices in Europe up 133 per cent, food prices up 46 per cent and fertilisers up 93 per cent.
But, intuitively, they must know the danger is grave. It is impossible to believe that Russia’s invasion of Ukraine has not had a massive polarising impact on global patterns of economic engagement. So, too, has the US move to “Made in America” policies and subsidies, its technology war with China and its changing stance on multilateralism that it has shaped and nurtured for decades.

Other evidence of grave fragmentation danger is clear. There has been a surge in trade restrictions since the crippling of the WTO’s trade dispute settlement mechanism, from an average of 500 restrictions a year between 2013 and 2017 to 1,500 in 2020 and 2,800 last year.

According to a Reuters report, 29 international trade disputes are hanging in limbo because of the sidelining of the WTO’s dispute settlement mechanism. WTO members’ formally reported “issues of trade concern” have risen from 31 in 2016 to 130 last year. Keith Rockwell, long-time communications head for the WTO and now with the Hinrich Foundation, summed up the precarious state of multilateralism when he noted that the WTO “is teetering on the abyss of irrelevance”.

So, while the data is still sparse and a hassle to interpret, companies worldwide share the fragmentation angst. The Paris-based International Chamber of Commerce is already concluding the worst: “Technology is being nationalised and weaponised to ensure national security or strategic autonomy,” it recently reported.

In the coming week, there will be many leading economists gathered in Marrakech who vividly describe the costs and dangers of economic fragmentation and call for an urgent return to multilateral cooperation.

Sadly, they are likely to be whistling in the wind as many of the world’s most powerful countries continue to dig steadily deeper protectionist trenches. There is no telling how long it will take for them to discover the folly of their choices.

David Dodwell is CEO of the trade policy and international relations consultancy Strategic Access, focused on developments and challenges facing the Asia-Pacific over the past four decades

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