Hard to win, but easy to lose
The global flows of goods, services and capital have slowed significantly since the global financial crisis of 2008, breaking the globalisation process that had become common after the Second World War. Today, geo-economic fragmentation, or bloc-formation, has allowed economic considerations to be superseded by political factors such as national security and sovereignty.
Hard to win, but easy to lose
The Economics of Geography

Hard to win, but easy to lose

Photo: iStock
Martin Santo 30/08/2024 06:00

The global flows of goods, services and capital have slowed significantly since the global financial crisis of 2008, breaking the globalisation process that had become common after the Second World War. Today, geo-economic fragmentation, or bloc-formation, has allowed economic considerations to be superseded by political factors such as national security and sovereignty. The Makronóm Institute has carried out a comprehensive study of the impact of these processes on the world economy.

Protectionism, which is gaining ground due to geopolitical tensions, could transform trade relations and global supply chains. Protectionist measures introduced by the United States or the European Union are aimed at protecting their own economies against their geopolitical adversaries. As a result, the growth rate of US and EU trade with China may slow down while they look for new partners. However, this shift will have serious consequences for consumers and national economies alike.

Technological competition and restrictions between countries could worsen the economic outlook. As competing parties seek to protect their own technology, international scientific and technological cooperation may also be undermined. The loss of international programmes between universities could set back global technological development, which is urgently needed to tackle global problems such as climate change. Technological fragmentation could lead to a loss of productivity, which would be a major challenge for less developed countries in particular, where new technologies would not reach.

Fragmentation could also lead to instability in financial markets and a loss of investor confidence. This could be triggered by various restrictions in financial markets on trade in goods and technology. A fall in trade in goods between blocs would increase inflation, leading to further central bank tightening, raising financing costs. In addition, there is a growing desire to break the US dollar's leadership, which could also destabilise financial markets.

Foreign direct investment (FDI) flows also seem to be shifting in response to geopolitical fragmentation. Western companies have increasingly started to build factories within their own bloc, breaking the trend. From countries that did not condemn Russian aggression at the UN, capital began to flow to countries that did.

The biggest beneficiaries of the FDI shift could be the so-called "connector states". If inter-bloc corporate cooperation is maintained, some countries could act as connectors. Examples of this include Indonesia, Vietnam, Mexico and Hungary, where companies, capital and technologies from opposite blocs may be able to cooperate with each other.

In commodity markets, too, there could be significant effects of continued bloc-formation. As different raw materials are highly concentrated geographically, the loss of intensive trade could lead to supply problems. Overall, trade restrictions could lead to a global GDP contraction of 0.3 per cent.

Bloc-formation would therefore certainly have a negative impact on world economic growth. The Makronóm Institute has examined four possible scenarios, each of which would lead to a fall in GDP, the extent of which would depend mainly on the restrictions imposed by countries and the policies they pursue:

  1. The energy deficit scenario: this scenario would reduce the baseline of global GDP, i.e. the expected economic output without decoupling, by 1.5 per cent. This would be the result of tariff and non-tariff restrictions on high-tech manufacturing and energy inputs.
  2. Trade embargo scenario: would lead to a global GDP loss of at least 1.9 per cent compared to the baseline. This would happen if all countries could only trade within their own bloc.
  3. The inward-turn scenario: would result in a loss of 5 per cent of global GDP and 4.4 per cent of EU GDP. We would see such a decline if import tariffs and state aids increased.
  4. Decoupling from China scenario: the EU's economic relations with China would be severely limited. This would lead to a 0.6 per cent decline in the EU's economic output, resulting in 1.056 million job losses and a 0.7 per cent increase in consumer prices. The fall would be larger than Croatia's annual GDP and would be around twice the annual amount allocated to the EU's Common Agricultural Policy (CAP).

The author is a senior analyst at the Makronóm Institute

#connectivity

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