IMF: Fragmentation May Cost 7% of GDP

Trade fragmentation could cost the global economy as much as 7% of GDP, the International Monetary Fund (IMF) said in a January report.

Predictions for the cost to the global economy of this fragmentation range from 0.2% to 7%, with the top-end of the predictions being equivalent to about the combined annual output of Germany and Japan. IMF estimates that include technological disconnect among regions are even worse, potentially reaching 12% of GDP.

Russia’s invasion of Ukraine and the COVID-19 pandemic have contributed to rising global fragmentation, as they’ve interrupted the flow of funds, food, and energy supplies and imposed additional trading restrictions.

“The risk is that policy interventions adopted in the name of economic or national security could have unintended consequences, or they could be used deliberately for economic gains at the expense of others,” the report said.

Restrictions on cross-border migrations, reduced capital flows, and a decline in international cooperation are listed as forms of fragmentation.

Small open-market economies are particularly exposed to the impact of fragmentation, as lower-income consumers in advanced economies would no longer have access to cheaper imported goods.

“Most of Asia would suffer due to its heavy reliance on open trade,” according to the report.

Also, emerging and developing economies would no longer benefit from the “technology spillovers” from advanced economies. In the past, these have positively affected growth and living standards.

“Instead of catching up to advanced economy income levels, the developing world would fall further behind,” the report continued.

To fight fragmentation, the IMF suggests strengthening the international trade system, helping vulnerable countries deal with debt, and increasing action on climate change.