US-China rivalry could fragment global economy, IMF chief warns


PHNOM PENH, Cambodia — The global economy is splitting into rival blocs and threatening a repeat of the Cold War that would leave almost everyone worse off, the head of the International Monetary Fund said on Saturday.

According to Kristalina Georgieva, the fund’s executive director, US and European efforts to reshape global supply chains make sense if they help eliminate the dependency on a single supplier that has proved so disruptive during the pandemic. But if the two powers erect new trade barriers to gain an advantage in their geopolitical competition, they could set in motion a destructive cycle that would hurt the middle class and poor households and leave the rich unharmed.

“My concern is deepening fragmentation of the global economy,” Georgieva said in an interview with The Washington Post. “Perhaps we are sleepwalking into a world that is poorer and less secure as a result.”

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A world economy split into opposing camps would shrink by 1.5 percent or more than $1.4 trillion annually, according to the IMF. In Asia, the center of global value chains for electronics, apparel and manufactured goods, the percentage of losses would be twice as high, she said.

“I experienced the first Cold War on the other side of the Iron Curtain. And yes, it’s pretty cold out there,” said Georgieva, who was born and raised in Bulgaria. “And going into a second cold war for another generation is… very irresponsible.”

Annual trade between the US and China is still substantial, exceeding US$600 billion. And the US and Chinese economies are so intertwined that Georgieva believes a complete break is impossible.

But since former President Donald Trump began imposing tariffs on imports from China in 2018, talk of the US “decoupling” from the world’s second-biggest economy has increased. Both the United States and China have taken steps to become more independent.

For example, under Chinese President Xi Jinping, the government in Beijing has subsidized the development of domestic high-tech industries with mixed results. President Biden has emphasized reducing US reliance on foreign suppliers for a range of products including medical supplies, computer chips and rare earth materials used to make smartphones, electric vehicles and fighter jets.

Treasury Secretary Janet L. Yellen is also making the same move. This week she traveled to India, promoting what she calls “friend-shoring” or relying on US allies rather than potential adversaries like China for critical materials.

The underlying challenge since 2020 is that the pandemic, extreme weather events and war in Ukraine have disrupted dozens of assembly lines. Shortages of personal protective equipment, semiconductors and natural gas have convinced US and European officials to pay more for redundant supply links.

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This post-pandemic supply chain diversification made sense up to a point, Georgieva said. But if it “goes beyond economic logic, it would be detrimental to the US and the rest of the world,” she added.

As an example, she cited Trump’s tariffs on more than $300 billion in US imports from China, which the Biden administration is sticking to. These measures did nothing to reduce the US trade deficit with China that Trump promised to eliminate and resulted in American consumers having to pay higher prices for Chinese products.

“It’s important to think carefully about actions and what they might elicit as countermeasures, because once you let the genie out of the bottle, it’s difficult to put it back in,” she said.

While she believes that “some re-globalization is needed,” political support for such efforts will only materialize if more is done to compensate workers who she sees losing to free-flowing trade.

“If an entire industry goes abroad and no attention is paid to the people whose jobs are gone, no effort is made to provide access to opportunities and new skills, then of course there will be widespread dissent,” she said .

However, if countries cut global trade links and instead turned inward, such measures would only boomerang and hurt those same workers by raising prices, she said.

Georgieva, 69, has held the fund’s top position since 2019. The former economics professor has also held senior positions at the World Bank and the European Commission.

She spoke to The Post while attending two Asian summits attended by President Biden and other world leaders. Along with the US President, she is scheduled to attend the upcoming Group of 20 summit in Bali, Indonesia, which is expected to focus on dealing with the economic aftershocks of Russia’s invasion of Ukraine, developing debt relief plans for poorer countries and managing the slowdown the world economy.

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