An escalating cold war between US and China would be a blow to global growth, IMF official says

• A brewing US-China cold war could drag global economic growth down as much as 7%, an IMF official said this week.
• The emergence of "connector" countries is why the effect of ongoing tensions hasn't been bigger.
• Trade fragmentation carries a higher price tag compared to the US-Soviet cold war, the official said.

A more intense cold war between the US and China would have a potentially dire impact on the global economy, according to an official from the International Monetary Fund.

Speaking at Stanford University on Tuesday, IMF deputy managing director Gita Gopinath said that while US-China tensions haven't yet devolved into a full-blown cold war, such an escalation would be a major headwind to global growth.

The IMF predicts that the global economy could incur economic costs equivalent to as much as 7% of the world's GDP in the worst-case scenario and take a 0.2% hit to growth in milder scenarios.

According to the fund, lower-income countries could suffer four times the loss of economic output compared to other nations if commodity markets split into blocs aligned with either China or the US.

Conflict between the world's two largest economies has escalated to a new heights since the pandemic. With China's growing economic ambitions and recent aggressions against neighboring countries, the US has put up new guardrails in its dealing with China, including restricting trade in key areas both countries are racing to dominate, such as AI.

IMF data shows that more than 3,000 trade restrictions were imposed globally in 2022 and 2023, more than triple the count from 2019, with Gopinath saying that trade within the China and US blocs has dropped compared to intra-group trade.

The tensions have also dented flows of foreign capital to China, with the country suffering its first foreign investment deficit in November 2023 and seeing further declines in the first three months of 2024.

The emergence of "connector" countries, which have acted as neutral go-betweens for the US and China, may be the reason the impact of tensions hasn't been greater.

"The emergence of these 'connector' countries—perhaps most notably Mexico and Vietnam—may have helped cushion the global economic impact of direct trade decoupling between the U.S. and China," Gopinath said.

Zooming out, Gopinath highlighted that geopolitical instability in regions like the Middle East and turmoil stemming from the Russia-Ukraine war has sparked trade turbulence unseen since the Cold War.

The IMF emphasized that trade fragmentation carries a higher price tag today, with the goods trade-to-GDP ratio now at 45% compared to 16% at the onset of the Cold War.