China-West rift threatens 'upside down’ for global economy, IMF official warns

His comments come at a time of heightened geopolitical uncertainty over a number of challenges, particularly the escalating rivalry between the US and China and the war in Ukraine.

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An unwinnable conflict? US-China trade war, 5 years

An unwinnable conflict? US-China trade war, 5 years

Although economic fragmentation is not yet as severe as it was during the Cold War, Gopinath said it has a higher potential cost due to greater global reliance on trade.

Between 2017 and 2023, China’s share of U.S. imports fell by 8 percentage points, while the U.S. share of China’s exports fell by about 4 percentage points as trade and overall ties between the two countries frayed.

Gopinath said trade between countries allied with China or the US has also been negatively affected.

Between 2022 and mid-2023, compared to the five-year period between 2017 and early 2022, average quarterly trade growth between pro-US and pro-China countries declined by nearly five percentage points.

Similar patterns were observed following Russia’s invasion of Ukraine, with intra-group trade and investment falling more than intra-group trade.

Meanwhile, according to Gopinath, the monetary system of the Trade Fund has become more dependent on China than that of other countries. The proportion of US dollar-denominated trade finance payments to China-dependent countries has fallen since the start of 2022, while the yuan-denominated share has doubled from about 4 to 8 percent. Pro-American countries experienced little change.

This will continue despite the exclusion of Russia from the China-dependent group, indicating a wider trend globally.

Gopinath’s speech coincided with President Xi Jinping’s first diplomatic trip in five years, with stops in France, Serbia and Hungary planned to ease fears over China’s economic ambitions. Close ties with Russia.

High-level talks between Beijing and the West have increased in recent months, as top officials try to mend ties that have been tested for years by national security concerns, allegations of anti-competitive behavior and China’s support for Russia in the wake of its aggression in Ukraine. A number of Western sanctions followed.

Foreign direct investment According to official data released last month, flows from January to March this year were only 301 billion yuan – a 26 percent drop year-on-year.

Despite Beijing’s efforts to attract foreign investors, many international firms remain cautious, citing China’s economic slowdown and ongoing geopolitical tussles.

A study by the American Chamber of Commerce in China Released in February It found that almost half of respondents do not plan to expand investment in China. A separate survey by the European Chamber of Commerce in China in June found that 11 percent of respondents had already shifted investments away from China, and 8 percent planned to shift investments to China elsewhere.

So far, the erosion of direct US-China economic ties has been mitigated by third-party „connector countries” such as Mexico and Vietnam, which have become conduits for trade diversion, Gopinath said.

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A dialogue between the US and China – which we are seeing now – will help prevent the worst from happening

Geeta Gopinath

But the cost of deteriorating sectors varies greatly, he added, with losses ranging from 0.2 percent of global GDP in a mild case to 7 percent in a severe case.

The effects of such a downturn will not be uniform, and the IMF predicts that low-income countries will be hit hardest by trade fragmentation as they rely heavily on agricultural imports and investment from developed countries.

Going forward, „practical steps” must be taken to rebuild trust, Gopinath said, starting with countries. Open lines of communication.

„Dialogue between the US and China – which we are seeing now – will help prevent bad consequences. Non-aligned countries can also play a bigger role by using their economic and diplomatic strength to unify the world,” he said.

Others are less confident in their predictions. A separate report released by the Economist Intelligence Unit on Tuesday predicted that economic and diplomatic relations between China and the United States would deteriorate for the rest of the decade, regardless of the outcome of the US presidential elections in November.

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