Senior IMF official warns fragmentation in global economy could trigger 'new Cold War'

Medellin, US

Gita Gopinath, a senior International Monetary Fund (IMF) official warned during a speech in Colombia on Monday (Dec 11), that the world economy is on the brink of a second cold war, which could "annihilate" progress made since the collapse of the Soviet Union. 

The IMF's first deputy managing director also said that the fragmentation in the global economy into power blocs, such as China the United States and Russia, could impact global output and wipe out trillions of dollars. 

She said that the clear shifts in underlying bilateral trade because of all these factors could result in a "new Cold War". 

Notably, the Cold War was a period of geopolitical tension between the US and the Soviet Union, as well as their respective allies, between 1945 and 1991. 

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"If we descend into Cold War II, knowing the costs, we may not see mutually assured economic destruction. But we could see an annihilation of the gains from open trade," told the International Economic Association in Medellin, Colombia. 

She said that losses could reach 2.5 per cent to seven per cent of global gross domestic product if the world economy fragmented into two blocs. 

"While there are no signs of broad-based retreat from globalisation, fault lines are emerging as geoeconomic fragmentation is increasingly a reality. If fragmentation deepens, we could find ourselves in a new Cold War," she said. 

As she warned the world, she urged the leaders to pull back from the brink and work towards shared economic priorities. 

Her remarks came amid the ongoing war between Russia and Ukraine, the war between Israel and Hamas, existing tensions between the US and China, and other conflicts which resulted in a slowdown in international trade. 

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"While there are no signs of broad-based retreat from globalisation, fault lines are emerging as geoeconomic fragmentation is increasingly a reality. If fragmentation deepens, we could find ourselves in a new cold war," she said. 

A Reuters report mentioned that China is no longer the largest US trading partner, with Mexico having assumed that role after years of increasing trade tensions and rising tariffs. 

China's share of US imports fell to 13 per cent in the first half of 2023 from 22 per cent in 2018. Around 3,000 trade-restrictive measures were imposed last year around the world - nearly three times the number imposed in 2019. 

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'The costs could easily overwhelm benefits' 

She said that such fragmentation has potentially serious consequences that could outweigh greater domestic economic resiliency and security. 

Gopinath added, "If not properly managed, the costs could easily overwhelm these benefits, and potentially reverse nearly three decades of peace, integration, and growth that helped lift billions out of poverty." 

She said that the global fragmentation will make it harder to address common concerns such as climate change, and she urged governments to adopt "pragmatic" policies that preserve the benefits of free trade to the greatest extent possible. 

(With inputs from agencies)