"7% of Global GDP Eroded by Division" (Comprehensive)

IMF's Warning "Pandemic, War, Brexit, etc.
Geographical and Economic Fragmentation Further Contracts the Global Economy"

[Asia Economy Reporter Yujin Cho] "A series of global divisions stemming from the pandemic, the Ukraine war, and Brexit (the United Kingdom's withdrawal from the European Union) could reduce global gross domestic product (GDP) by up to 7%."

The International Monetary Fund (IMF) warned in a report published on the 15th (local time) that reduced international economic cooperation and trade volumes could lead to a significant global economic setback, especially for low-income countries. It noted that rising cross-border labor barriers and export restrictions delaying technology diffusion could cause losses of 8-12% in some emerging and other countries. The IMF pointed out, "Rising import prices, market segmentation, and reduced cross-border movement of unskilled labor will ultimately lead to increased costs and decreased productivity."

The IMF highlighted that the pandemic, the subsequent Ukraine crisis, divisions among Western countries due to Brexit, and the ongoing US-China trade war are further contracting the global economy, which has yet to fully recover from the 2008 financial crisis. During the height of the pandemic in 2020-2021, supply chain disruptions and export restrictions affected about 90% of global trade volume. Furthermore, the war between Ukraine and Russia, which began in February last year, and the Western sanctions in response have caused major disruptions in global energy and agricultural markets.

[Image source=AP Yonhap News]

Before the Ukraine crisis, European countries such as Germany and France were major trading partners of Russia, with high import shares of machinery, equipment, food, agricultural products, and raw materials. However, following successive export restrictions due to economic sanctions against Russia, trade volumes with Europe have been on a downward trend since immediately after the Ukraine crisis in February last year.

As major global companies focus on restructuring supply chains centered on their home countries, mentions of 'Onshoring,' 'Reshoring,' 'Nearshoring,' and 'Friend-Shoring' have increased in corporate earnings conference calls and investor meetings. US Treasury Secretary Janet Yellen has also referred to Friend-Shoring (relocating production facilities to allied countries) multiple times in recent months.

Various institutions have analyzed that the world economy is shifting toward fragmentation through reshoring (returning production facilities previously moved overseas back to the home country), onshoring (attracting foreign companies domestically or expanding domestic outsourcing by domestic companies), and similar trends. They explain that the era of offshoring, which involved advancing production bases overseas to secure price competitiveness, has come to an end.

[Image source=AP Yonhap News]

The IMF warned that the decades-long increase in economic integration is at risk of reversal due to this series of crises, raising concerns about geographical economic fragmentation. It stated that even limited fragmentation could reduce global GDP by about 2%, and emphasized the need for more detailed analysis of its impact on the international monetary system and the global financial safety net (GFSN).

So far, the IMF evaluates that economic globalization has significantly contributed to reducing poverty worldwide and has benefited low-income consumers in developed countries. However, it predicted that economic fragmentation would most negatively affect poor countries and low-income groups in developed countries. In particular, it analyzed that as fragmentation of international payment systems and regional decentralization of finance progress, the negative impacts on emerging and low-income countries could increase.

The IMF also warned that if economic fragmentation occurs amid reduced international risk-sharing, macroeconomic volatility could increase, leading to more severe crises. Additionally, it expressed concerns that the international community's ability to support countries in crisis would weaken, complicating future resolutions of sovereign debt crises.