Asia most at risk if global trade fragments

The International Monetary Fund cautioned that Asia-Pacific has more to lose than any other region if the global trade system fragments as a result of geopolitical conflicts.

According to an IMF study published on Friday, Asia and Pacific nations might see a loss of more than 3% in gross domestic product if trade is cut off in sectors affected by recent U.S. semiconductor penalties on China and if non-tariff barriers in other areas are elevated to “Cold War-era levels.” That is equivalent to twice the estimated yearly worldwide losses.

The analysis also showed that industries in Asian nations that are forced to contract because of decreased trade might experience average employment losses of up to 7%.

“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,” an IMF director said.

During the U.S.-China trade dispute in 2018, there were indications of global disintegration. But additional worrying indications, like the war between Russia and Ukraine, have subsequently surfaced. Trade relations are now considerably more ambiguous as a result of Russian sanctions.

Economic activity may be hampered by policy uncertainty around trade, not simply by actual trade restrictions, as businesses may delay employment and investment decisions and new businesses may delay market entry.

For instance, the study discovered that after two years, the 2018 U.S.-China trade tensions decreased investments by around 3.5 percent. The effects of trade fragmentation are more severe for Asian emerging economies and businesses with high levels of debt. While the IMF’s research concentrated on the effects of trade fragmentation, it warned that there could be other, more serious negative effects as well, like the “unravelling 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 report said.

The international body is urging countries to roll back damaging trade restrictions and reduce uncertainty through clearer communication of policy objectives.