Geoeconomic fragmentation, a policy-driven reversal of global economic integration, may be caused due to trade restrictions, barriers to the spread of technology (technology diffusion), restrictions on cross-border migration, reduced capital flows, and a sharp decline in international cooperation. These will affect various segments of the population and country differently. For instance, lower income consumers in advanced economies will lose access to cheaper imports, and economies heavily reliant on trade will suffer and per capita income catch up becomes challenging and adjustment costs rise.
According to a new IMF staff discussion note, the cost to global output from trade fragmentation could range from 0.2 percent (in a limited fragmentation / low-cost adjustment scenario) to up to 7 percent of GDP (in a severe fragmentation / high-cost adjustment scenario); with the addition of technological decoupling, the loss in output could reach 8 to 12 percent in some countries.
The IMF recommends a pragmatic approach to increasing geoeconomic fragmentation. These include strengthening international trade system including diversification of supply; helping vulnerable countries deal with debt as fragmentation makes it harder to resolve sovereign debt crises if key official creditors are divided along geopolitical lines; stepping up climate action including setting a floor on international carbon price and innovative use of public balance sheets—such as credit guarantees, equity and first-loss investments— to help mobilize funds for private financing.
About 15 percent of low-income countries are already in debt distress and an additional 45 percent are at high risk of debt distress. Among emerging markets, about 25 percent are at high risk and facing default-like borrowing spreads.
