Changing Global Linkages: A New Cold War?

ChangingGlobalLinkages:ANewColdWar? GitaGopinath,Pierre-OlivierGourinchas,AndreaF.Presbitero,andPetiaTopalova WP/24/76 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate. TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. 2024 APR ChangingGlobalLinkages:ANewColdWar?* GitaGopinath,Pierre-OlivierGourinchas,AndreaF.Presbitero,andPetiaTopalovaApril2024 Abstract Globallinkagesarechangingamidstelevatedgeopoliticaltensionsandasurgeinpoliciesdi-rectedatincreasingsupplychainresilienceandnationalsecurity.Usinggranularbilateraldata,thispaperprovidesnewevidenceoftradeandinvestmentfragmentationalonggeopoliticallinessinceRussia’sinvasionofUkraine,andcomparesittothehistoricalexperienceoftheearlyyearsoftheColdWar.GravitymodelestimatespointtosignificantdeclinesintradeandFDIflowsbetweencountriesingeopoliticallydistantblocssincetheonsetofthewarinUkraine,relativetoflowsbetweencountriesinthesamebloc(roughly12%and20%,respec-tively).Whiletheextentoffragmentationisstillrelativelysmallandwedonotknowhowlonglastingitwillbe,thedecouplingbetweentherivalgeopoliticalblocsduringtheColdWarsuggestsitcouldworsenconsiderablyshouldgeopoliticaltensionspersistandtraderestrictivepoliciesintensify.DifferentfromtheearlyyearsoftheColdWar,asetofnonaligned‘con-nector’countriesarerapidlygainingimportanceandservingasabridgebetweenblocs.Theemergenceofconnectorshaslikelybroughtresiliencetoglobaltradeandactivity,butdoesnotnecessarilyincreasediversification,strengthensupplychains,orlessenstrategicdependence. JELClassification:F14,F60,I18 Keywords:Trade;Foreigndirectinvestment;Geoeconomics;Fragmentation *Authors’contacts:GitaGopinath,InternationalMonetaryFund,e-mail:ggopinath@imf.org;Pierre-OlivierGour-inchas,InternationalMonetaryFundandCEPR,e-mail:pgourinchas@imf.org;AndreaF.Presbitero,InternationalMon-etaryFundandCEPR,e-mail:apresbitero@imf.org;PetiaTopalova,InternationalMonetaryFundandCEPR,e-mail:ptopalova@imf.org.ShanChenandMonaWangprovidedexcellentresearchassistance.Wethanknumerouscolleaguesandparticipantsatthe2023AsiaEconomicPolicyConferenceandthe2024AEAConferenceforhelpfulcommentsandsuggestions.TheviewsexpressedherearethoseoftheauthorsandshouldnotbeattributedtotheInternationalMon-etaryFund,itsExecutiveBoard,oritsmanagement. 1Introduction Overthepastdecade,thefutureofglobaleconomicintegrationhasbeenincreasinglychallenged.Disillusionmentwiththeunevenbenefitsoftrade,fragilityofhighlyspecializedglobalsupplychainsexposedbytheCOVID-19pandemic,andgeopoliticalfrictionsheightenedbythewarinUkraineareallcontributingtorethinkingcommitmentstofreetrade.In2015,theChinesegovern-mentannouncedthe‘MadeinChina2025’initiative,withthegoalofupgradingitsmanufactur-ingindustry,reducingitsrelianceonforeigntechnology,andraisingthedomesticcontentofcorecomponentsandmaterialsto70percentby2025.In2018,theU.S.raisedtariffsonawiderangeofimportsfromChina.Policymeasuresbyadvancedandemergingmarketeconomies,whichdirectlyorindirectlyrestricttradeflows,havesurged.1Yet,despitethesechangesinthepolicyenvironmentandpublicsentiment,therearenosignsofsignificantchangesintheextentofglob-alization,crudelydefinedastheratioofglobaltradetoGDP.Sincearoundthetimeoftheglobalfinancialcrisis,whenthe2000shyperglobalizationcametoanend,theratioofgoodstradetoGDPhasfluctuatedbetween41and48percent(Figure1,PanelA).Foreigndirectinvestment(FDI)hasbecomemoresubdued:globalFDIasashareofGDPhasdeclinedfromaround3.4beforetheglobalfinancialcrisisto2.5percentthereafter.2 Anumberofstudieshavearguedthatunderneaththerelativelystableaggregatetrends,aredi-rectionoftradeandinvestmentflowsacrosscountriesistakingplace,potentiallyasymptomoffragmentation(Aiyaretal.,2023a;Freundetal.,2023;AlfaroandChor,2023;Blanga-GubbayandRubínová,2023;WorldTradeOrganization,2023).Thenewlypopularterm,“geoeconomicfrag-mentation”referstopolicy-inducedchangesinthesourcesanddestinationsofcross-borderflows,oftenguidedbystrategicconsiderations,suchasnationalandeconomicsecurity,sovereignty,au-tonomy,whichmayormaynotbeassociatedwithadeclineinworldtraderelativetoGDP.Thisterm,alongwith“reshoring,”“nearshoring”and“friend-shoring”isincreasinglymentionedincompanies’earningscalls(FigureA1,PanelB).AndthereisbynowrobustevidencethatthetradetensionsbetweentheU.S.andChinasince2018havetriggeredareallocationofthesupplychainsthathaveintertwinedtheworld’stwolargesteconomiesoverthepastdecades.3Freund,Mattoo,MulabdicandRuta(2023)andAlfaroandChor(2023)demonstratethattariffsonChineseprod-uctshaveeffectivelydecreasedU.S.importsfromChina,withlow-wagecountriesthatarelinkedtoChina’ssupplychainsandhaveexportbasketssimilartoChina’sgainingimportshareinU.S.markets(seealsoDangandZhao,2023;Utar,CebrerosZuritaandTorresRuiz,2023).However, 1SeeFigureA1,PanelA,intheAnnex,andevidencediscussedbyJuhász,LaneandRodrik(2023),whoarguethattheriseofthesemeasurespredatethecurrentsurgeinindustrialpolicyspending. 2Foradiscussionondeglobalizationtrends,see,among