In a speech at the Stanford Institute for Economic Policy Research, Gita Gopinath, the First Deputy Managing Director at the International Monetary Fund (IMF), highlighted significant shifts in global economic ties.
These changes, she noted, are reminiscent of the dynamics seen during the Cold War era.
Gopinath said that, "The COVID-19 pandemic, coupled with Russia's invasion of Ukraine, has prompted nations to reassess their trading partners with a focus on both economic and national security considerations. This reevaluation has led to a redirection of foreign direct investment flows along geopolitical lines"
One notable trend, Gopinath pointed out the reconsideration of heavy reliance on the US dollar in international transactions and reserve holdings by some countries.
"This shift reflects a broader effort to mitigate risks associated with sanctions, particularly among China bloc countries", she added.
Central to this realignment is the increased acquisition of gold by central banks, particularly between 2022 and 2023.
Gopinath highlighted that the rise in gold purchases has been driven by concerns about sanctions risk, particularly among countries within the China bloc.
She emphasized that this trend isn't just exclusive to China and Russia.
Comparing the current trade fragmentation with that of the Cold war period, stating, "Thus far, the disintegration is not significantly different from the initial years of cold war.However, compared to the average, "between bloctrade shortfall" during the entire cold war period, fragmentation so far is an order of magnitude smaller", she said.
Seh pointed that fragmentation is much costly this time around because unlike the start of the cold war when goods trade to GDP was 16 per cent., now that ratio is 45 per cent.
“Moreover, back then countries within a bloc were taking off trade restrictions, now we are in a environment of growing protectionism with several countries turning inward. The potential role of non-aligned countries also makes the situation today different from the cold war experience”, she said.
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