Asia Set to Lose the Most from a Global Economic Decoupling

The IMF said in a research released on Friday that Asia-Pacific has more to lose than any other region from a possible split up of global economy and trade system amid geopolitical tensions. The organization warned that Asia-Pacific nations could lose 3% of GDP if trade is cut off in sectors hit by recent U.S. semiconductor sanctions on China, and if non-tariff barriers reach Cold-War era levels. That’s twice the amount of projected global annual losses.

The IMF added that Asian industries forced to shrink because of reduced trade could suffer average emplyment losses of as high as 7%.

“When we talk about progression from rising trade uncertainty and more restrictive measures, [it] will eventually escalate into fragmentation where the world is divided,” IMF’s Director of the Asia and Pacific Department Srinivasan said.

“Asia risks losing a lot because it is a key player in global supply chains and in a fragmented world, it risks losing more than anybody else.”

A global economic decoupling is on the cards since U.S.-China “trade war” has begun in 2018, but more worrying geopolitical risks, such as Russia’s invasion of Ukraine have since emerged and exacerbated concerns. The IMF added that sanctions on Russia have created even more uncertainty around trade relations.

The international body also underlined that not just restrictions themselves, but policy uncertainty around trade could also hamper economic activity, as firms stop hiring and investments and new firms shelve entries into markets.

The IMF found that 2018 U.S.-China trade tensions had reduced investments by 3.5% after two years.

The impact of trade fragmentation is greater for emerging markets in Asia and for firms with high debt.

The IMF said while its research focused on the impact of fragmentation on trade, there could be other deeper downsides, such as the “unraveling of financial ties.”

“Financial fragmentation may lead to short-term costs from a rapid unwinding of financial positions, and long-term costs from lower diversification and slower productivity growth because of reduced foreign direct investment,” the IMF said.

The organization urged countries to abandon damaging trade restrictions and reduce uncertainty through more transparent communication of policy objectives.

“Greater emphasis can be placed on digitalization, investing in education … but most importantly, international cooperation, because we want to avoid the risk of fragmentation … it’s important that we all act now, act together,” Srinivasan said.

Lower interest rates in Asia than those in the United States have also been a cause for concern as capital flows out of Asia. Srinivasan said they have been manageable so far.

“…we saw a lot of capital flow for India, we saw capital flows for Taiwan, China, and moderate flows from Indonesia, moderate flows for Malaysia, but we saw some net inflows into Thailand. And more recently, we see flows back into India. So the picture is a bit mixed,” he said.

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