Growing tensions between China and US threaten global economy

The International Monetary Fund (IMF) has warned that growing tensions between the United States and China threaten global trade and economic growth.

According to top IMF official, Gita Gopinath, several factors including the COVID-19 pandemic and the war in Ukraine, have seriously disrupted global trade. She explained that countries are increasingly considering economic and national security when making trade decisions, often choosing to align with either the US or China.

Gopinath warned that dividing the global trade system could reverse many gains from economic integration. This division is already having effects : trade restrictions have tripled since 2019, and trade between the US-led group (including Europe, Canada, Australia, and New Zealand) and the China-aligned group (including Russia and Syria) has fallen, especially since the Ukraine conflict began. Trade between these groups has dropped by about 12%, and foreign investment within each group has decreased by 20%.

China, in particular, has seen a sharp decline in foreign investment, with a 26% drop in the first quarter of 2024 compared to the same period in 2023.

The IMF estimates that extreme fragmentation could reduce global GDP by up to 7%, with low-income countries that depend heavily on foreign investment and agricultural imports being hit hardest.

However, there are some positive signs. The ratio of global trade to global GDP has stayed relatively stable over the past twenty years, partly due to non-aligned countries like Mexico and Vietnam, which help facilitate trade and investment flows. The IMF believes these countries can play a key role in promoting global economic integration.

Cape Times