Geoeconomic Fragmentation: The Economic Risks from a Fractured World Economy

EditedbyShekharAiyar,AndreaF.PresbiteroandMicheleRuta GeoeconomicFragmentationTheEconomicRisksfromaFracturedWorldEconomy GeoeconomicFragmentationTheEconomicRisksfromaFracturedWorldEconomy CEPRPRESS CentreforEconomicPolicyResearch187boulevardSaint-Germain 75007,Paris,France 33GreatSuttonStreetLondon,EC1V0DX,UK Tel:+44(0)2071838801 Email:cepr@cepr.orgWeb:www.cepr.org ISBN:978-1-912179-78-7 Copyright©CEPRPressandInternationalMonetaryFund,2023 GeoeconomicFragmentationTheEconomicRisksfromaFracturedWorldEconomy EditedbyShekharAiyar, AndreaF.PresbiteroandMicheleRuta CENTREFORECONOMICPOLICYRESEARCH(CEPR) TheCentreforEconomicPolicyResearch(CEPR)isanetworkofover1,700researcheconomistsbasedmostlyinEuropeanuniversities.TheCentre’sgoalistwofold:topromoteworld-classresearch,andtogetthepolicy-relevantresultsintothehandsofkeydecision-makers.CEPR’sguidingprincipleis‘Researchexcellencewithpolicyrelevance’.ItwasfoundedintheUKin1983,whereitisaCharity,andinNovember2019CEPRinitiatedthecreationofanAssociationunderFrenchlaw,inordertoprovideavehicleforanexpansioninFrance.ThemembersoftheConseild’AdministrationoftheAssociationareidenticaltotheUKBoardofTrustees. CEPRisindependentofallpublicandprivateinterestgroups.IttakesnoinstitutionalstandoneconomicpolicymattersanditscorefundingcomesfromitsInstitutionalMembers,projectsthatitrunsandsalesofpublications.Becauseitdrawsonsuchalargenetworkofresearchers,itsoutputreflectsabroadspectrumofindividualviewpointsaswellasperspectivesdrawnfromcivilsociety.CEPRresearchmayincludeviewsonpolicy,buttheTrustees/membersoftheConseild’AdministrationoftheAssociationdonotgivepriorreviewtoitspublications.TheopinionsexpressedinthisreportarethoseoftheauthorsandnotthoseofCEPR. ChairoftheBoardSirCharlieBeanFounderandHonoraryPresidentRichardPortes PresidentBeatriceWederdiMauro VicePresidentsMaristellaBotticiniPhilippeMartinUgoPanizza MarReguantHélèneRey ChiefExecutiveOfficerTessaOgden INTERNATIONALMONETARYFUND(IMF) TheInternationalMonetaryFund(IMF)isanorganizationof190countries,workingtofosterglobalmonetarycooperation,securefinancialstability,facilitateinternationaltrade,promotehighemploymentandsustainableeconomicgrowth,andreducepovertyaroundtheworld. Contents Acknowledgementsvii Forewordix Introduction1 ShekharAiyar,AndreaF.PresbiteroandMicheleRuta Section1:Geoeconomicfragmentation 1Geoeconomicfragmentation:Anoverview9 ShekharAiyarandAnnaIlyina 2Discussionofgeoeconomicfragmentationandthefutureofmultilateralism19 LauraAlfaro Section2:Trade 3Economiccostsoffriend-shoring29 BeataSJavorcik,LucasKitzmüller,HelenaSchweigerandMuhammedAYıldırım 4Geoeconomicfragmentation:Accountingforcommodities39 MarijnA.Bolhuis,JiaqianChenandBenjaminKett 5Estimatingthecostsofgeoeconomicfragmentationtotheglobaleconomy45 MichaelG.Plummer Section3:Technology 6Thepotentialimpactofglobaldecouplingaccountingforinnovationspilloversfromtrade55 EddyBekkersandCarlosGóes 7Sizinguptheeffectsoftechnologicaldecoupling63 DiegoACerdeiro,JohannesEugster,RuiCMano,DirkMuirandSJayPeiris 8Theimpactsoftechnologicalgeoeconomicfragmentation:Commentsandobservations75 KeithE.Maskus Section4:Financialflows 9WhatistheevidencethattradeuncertaintyaffectsUSbanklending?83 RicardoCorrea,JuliandiGiovanni,LindaS.GoldbergandCameliaMinoiu 10Geopoliticsandfinancialfragmentation:Implicationsformacro-financialstability91 MarioCatalánandTomohiroTsuruga 11Commentsongeopoliticsandfinancialfragmentation103 BradSetser Section5:GlobalvaluechainsandFDI 12GeopoliticsandthecostofFDIfragmentation117 ShekharAiyar,JaeBinAhn,AshiqueHabib,DavideMalacrino,DirkMuirandAndreaF.Presbitero 13US-Chinadecoupling:Rhetoricandreality127 CarolineFreund,AadityaMattoo,AlenMulabdicandMicheleRuta 14Discussionofgeoeconomicfragmentation,globalvaluechains,andforeigndirectinvestment135 DavinChor Section6:Concludingremarks 15What’snextforeconomicresearchongeoeconomicfragmentation?143 Pierre-OlivierGourinchas Acknowledgements ThiseBookarisesfromaconferenceontheeconomicimpactofgeoeconomicfragmentation,organisedbytheInternationalMonetaryFundinMay2023.Themainfindingsoftheresearchpaperspresentedattheconference,togetherwithdiscussionsbyspecialistsinthefield,aresummarisedinthechaptersofthiseBook.Weareextremelygratefultotheauthorsanddiscussantsfortheirtimeandexpertise.WewouldalsoliketoexpressourgratitudetonumerouscolleaguesinsideandoutsidetheInternationalMonetaryFundwhoprovidedvaluableinsightsandinputs.NicoleJalesprovidedsuperbadministrativesupportthroughouttheproject.OgmaBale,IlsePeirtsegaele,andEmilieStewartprovidedexcellentadministrativeandlogisticalsupportfortheorganizationoftheconference.WewouldalsoliketothankCEPRstafffortheiroutstandingeditorialworkinassemblingthiseBook. Foreword Ix Theworldisfacingtheriskoffragmentation,withearlysignstakingroot.Thenumberoftradeandforeigndirectinvestment(FDI)restrictionshasincreasedthree-foldsince2018.Thereisevidencethattradepatternsareshifting,asfirmsrespondtogrowingpolicyuncertaintyandlookforwaystoinsulatetheirsupplychainsfromgeopoliticalrisks.FDIisalsoincreasinglyconcentrated