Trading with friends and enemies: The threat of global fragmentation

euronews (in English)

Euronews sits down with Gita Gopinath, the first deputy managing director of the International Monetary Fund, to talk trade wars, net zero, and national security.

Transcript

00:00 [indistinct chatter]

00:03 Why are economists speaking about...

00:14 and should we be worrying about it?

00:16 After the COVID-19 pandemic and Russia's invasion of Ukraine,

00:21 countries have become increasingly worried about resilience,

00:24 about the security of their supply chains, about national security.

00:28 So trade policy is now being determined increasingly by concerns on security.

00:34 And we have seen a big increase in the number of restrictions that are being placed on trade,

00:39 sometimes the provision of subsidies, sometimes export controls.

00:43 The question is whether we are seeing anything in the data on trade flows

00:47 and whether we are seeing different directions in which trade is moving.

00:51 And the answer is yes, we are seeing that.

00:54 Now, let's take the very stark example of the European Union and energy.

00:59 After Russia's invasion of Ukraine and after Russia shut off gas supply to the region,

01:03 we saw this big increase in energy prices.

01:06 And appropriately, the European Union moved its supplies, where to buy its energy from.

01:12 So while the European Union continues to depend on the rest of the world for its energy,

01:17 it's coming from different places.

01:19 It's coming from the US and it's coming from Norway and from other countries.

01:23 And something similar is happening at a smaller scale, but more generally for global trade,

01:27 which is that while overall trade is not really in the world's share of GDP,

01:32 has not changed that much, where countries are buying from is shifting around.

01:37 So one of the exercises we did was to look at trade within a block of countries

01:42 that we view as being more politically aligned

01:45 and comparing that to trade across a block of countries which are less politically inclined.

01:50 And what we've seen since the war in Ukraine,

01:53 that trade within block trade is growing 1.5 percentage point more than between block trade.

02:00 So this phenomenon is happening.

02:02 It's still early stages, but we are certainly seeing it now in the data.

02:06 [Applause]

02:24 The worst case scenario would be if countries, say, decouple into two blocks

02:30 and there's literally no trade taking place between those two blocks.

02:33 We've modeled what the effect of that would be,

02:36 and that would reduce global GDP, global income, global output, by around 7%.

02:42 That is a very large number. It's like losing the economies of Japan and Germany.

02:47 So the cost can be very large because we are no longer relying on buying from the cheapest source in the world,

02:54 but we're trying to move production to our friends or move production home.

02:58 What would be even worse, of course, is if countries decide to do everything by themselves,

03:03 so not even rely on friends but just do all the production at home, the cost would be higher.

03:07 So this is a very costly place to go to.

03:10 Now, we are not there yet, and I think countries and governments are making the effort to prevent such a slide

03:17 so that the whole world doesn't end up in a bad place, but we have to be very careful.

03:21 In the European plan, the federal government has come a long way in ensuring that warrants the additional upfront economic costs.

03:30 And there are some medical...

03:31 Europe is in an interestingly unique place.

03:34 So first, if I think of the European Union, it is quite vulnerable to these fragmentation risks

03:41 because it is very open in terms of trade.

03:44 It's actually more open than even China. It's more open than the US, too.

03:48 It's also very open in terms of foreign direct investment.

03:51 So its external dependence is quite high.

03:54 That makes it vulnerable, but at the same time, it also is uniquely prepared to deal with fragmentation risks.

04:01 And the reason is that unlike the US, which is heavily concentrated on innovation,

04:06 and China, which is heavily concentrated on manufacturing,

04:09 the European Union, because it has a mix of advanced economies and emerging and developing economies,

04:14 it has both manufacturing and innovation.

04:17 And so it's able to rebuild supply chains within the European Union much faster.

04:22 Now, that's not going to happen automatically. You need the right policy investments.

04:26 But if they do that, that would help Europe, for instance, build resilience.

04:45 For all of us, we have benefited from a highly integrated global world

04:51 because that has made lots of goods cheaper for us to buy.

04:57 It has lowered the cost of living, and that has helped all of us.

05:00 Now, of course, I think countries are appropriately concerned about resilience.

05:05 They're appropriately concerned about security issues, given what we've seen over the last few years.

05:10 Therefore, it is important for policy to focus on resilience, too.

05:14 It's just important to make sure that you don't end up going down a slippery slope

05:18 where you have so much decoupling in the world that it just makes everything so much more expensive for all of us

05:24 and makes us worse off.

05:26 In fact, that would be a world also where we are all less safe,

05:30 because if we only depend on production at home and suppose a factory goes bust,

05:35 then that has an even bigger negative effect on our welfare

05:39 than if we were to rely on many trading partners.

05:42 So there are risks involved in that.

05:44 The benefits of having a deeper single market is that would bring along more capital for the EU

05:50 to invest in very important transitions that the European Union is going through,

05:54 including the green transition, including digitalization.

05:57 That requires a lot of investment.

05:59 So if you have the capital markets union, you have the banking union,

06:03 that will release the capital that's needed to be able to have a lot more increase in productivity

06:09 to make these green transition happen, and that's good for everybody.

06:13 I think it would absolutely help all countries, including Germany,

06:17 if there was a banking union, if there was a capital markets union,

06:21 because it would reduce also the cost of funds for firms in all the different regions of the European Union.

06:27 It's much more easier for capital to go where the returns are highest.

06:33 For instance, if you look at the green transition, you want to be able to do that in the most cost-effective way.

06:38 So for that, you want investment to happen where you get the biggest bang for the buck,

06:42 which is you get the most amount of carbon emission reduction by investing.

06:46 That doesn't happen automatically.

06:48 If you have more integrated markets, you get that kind of movement of capital and investment.

06:53 That's absolutely critical.

06:55 What's your main takeaway in that?

06:58 You do know I haven't stepped into the conference yet.

07:01 [inaudible]

07:09 I think everybody agrees, every country agrees, that it is important to invest in climate mitigation

07:16 and for many countries, in climate adaptation.

07:19 It's the one planet we have.

07:21 We need to make sure that we are able to preserve it for us and for future generations.

07:25 So that is a common understanding.

07:27 The question is what kinds of policies will make that transition happen.

07:31 There are two sets of policies that countries are relying on that could have implication for global trade.

07:37 One is in terms of providing subsidies to their companies, green subsidies, which help with the green transition.

07:44 And the other is something, for instance, the European Union has, which is the carbon border adjustment mechanism,

07:51 which is to the fact that carbon prices are higher in the European Union than in the rest of the world.

07:57 You want to be able to offset the impact on European firms and also make sure that you're not basically ending up

08:04 with importing from countries which are not good in terms of carbon emissions.

08:09 So what's the risk here?

08:11 I think the risk is on the subsidy side.

08:14 You can end up impeding trade.

08:16 And let me give you the specific example of within the single market.

08:19 Now, we have state aid that is being done in some countries that have more budgetary money

08:28 to be able to provide these kinds of subsidies.

08:31 Then that will disadvantage companies in other countries whose governments don't have the budgetary space

08:37 to provide that kind of support.

08:39 That affects the single market.

08:41 So that's one thing one has to be very careful about.

08:44 Similarly, with these border adjustment taxes, you have to make sure that this is compliant with global international trading rules.

08:52 And that means convincing your trading partners that this is not you trying to protect your industry,

08:58 but it is about making sure that globally we have lower emissions in the world.

09:04 And these are the kinds of actions that are required to make sure that the climate transition policies

09:10 don't end up inadvertently triggering some sort of trade war.

09:15 Thank you so much, Lisa.

09:16 Thank you.

09:17 Thank you so much.

09:18 [Whoosh]

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