Speech

Opening Remarks by First Deputy Managing Director Gita Gopinath at the IMF Conference on Geoeconomic Fragmentation

May 25, 2023

As prepared for delivery

Good morning.

First, I am honored to introduce such an impressive group of distinguished speakers to discuss how geoeconomic fragmentation is shaping the global economy.

Before we begin, let me share with you a few observations about how we currently see fragmentation and how further research could inform a way forward.

Context

We did not arrive at this current juncture overnight.

As momentum for traditional trade reforms stalled, trade restrictions and other distortive policy measures began to spread, especially in the aftermath of the global financial crisis.

At the same time, some workers and communities have been negatively affected by structural changes to the economy. Whether from technology or trade, these developments have inspired a lively debate about the merits of globalization.

The COVID-19 pandemic, Russia’s war in Ukraine, and the intensification of geopolitical rivalry have heightened concerns about national security and supply chain resilience.

These changes have ushered in the beginning of a new paradigm in the global economic order— one that shifts away from decades of global economic integration and in which inward- and alliance-oriented policies are gaining traction.

Early Signs

Let me be clear, this is not just rhetoric. The early signs of fragmentation are taking root.

There has been a surge in the number of trade and FDI restrictions, particularly in the high-tech sector, many of those explicitly linked to national security, which can be a legitimate concern.

            Key fact: The number of trade and FDI restrictions has increased three-fold since 2018.

Policymakers are increasingly considering and enacting measures to move production back home or to politically aligned countries. In some cases, countries are turning to discriminatory provisions, such as local content requirements in subsidy schemes or more stringent rules of origin in regional trade agreements. In other cases, screening of inbound and outbound investments is on the rise.

There is evidence that trade patterns are shifting, as firms respond to growing policy uncertainty and look for ways to insulate their supply chains from geopolitical risks. FDI is also increasingly concentrated among geopolitically aligned countries, as we showed in our April WEO.

Key fact: FDI flows are increasingly concentrated among geopolitically aligned countries (2.5 times higher than expected), particularly in strategic sectors.

This is not just about trade and investment flows—the increasing risks of fragmentation of the trade system is spreading to the financial system as well. Some countries are reducing their holdings of USD assets.

Key fact: China has reduced its holdings of U.S. Treasury Securities by 11 percent between February and September 2022.

Purpose of this conference

As geoeconomic fragmentation can potentially have enormous ramifications for the global economy in the years and decades ahead, the purpose of today’s conference is to highlight the importance of carrying out rigorous research in this area.

By bringing together fresh work done at the IMF and by scholars outside the institution, we want to shine a spotlight on this topic.

Together, we can learn which key aspects of fragmentation need to be better understood, come up with a clear, shared vision of our research agenda forward and consider the most effective policy options to mitigate fragmentation and deal with a more fragmented world. 

There are so many open and difficult questions and so much that we don’t know.

• First, what are the data telling us about the extent of fragmentation? We can see some signs, especially on the policy front, but are the policies having an effect? Is fragmentation showing up in patterns of trade, capital flows and investment? Are some regions more exposed than others?
• Second, fragmentation affects the global economy through many channels, but how are these channels interrelated? Do trade, investment, technological, and financial fragmentation reinforce each other? How can we assess such interlinkages?
• Third, what are the steps that governments can take to limit fragmentation and to mitigate its effects? What safeguards can be put in place? And how can third countries—the innocent bystanders of geoeconomic fragmentation—navigate a more uncertain policy environment?
• What should be the role of multilateral institutions, such as the IMF and the WTO? What actions and reforms can allow a new form of “pragmatic multilateralism”, as the Fund recently called it, to emerge?

Conclusion

I am confident that the ideas shared here today can contribute to provide some answers and make progress on this critical research agenda, which will be at the core of the Fund’s work in the coming months.

In fact, I would be remiss if I didn’t mention the upcoming issue of our magazine Finance and Development focusing on trade—out June 1—which I know includes important contributions from some of our speakers here today. [Caroline Freund, Ralph Ossa, Michele Ruta]

Thank you for being a part of this crucial conversation. Let me now turn it over to Ceyla who will be chairing our first session.