Cold War II: Global Trade Hangs by a Thread

Partial deglobalization, the severance of traditional trade ties not only between individual countries, but between entire geographic territories, will cost the global economy at least $3 billion in 2023. Analysts at the International Monetary Fund (IMF) came to this conclusion, according to which “disagreements between countries around the world are intensifying, and dangerous cracks are widening.”

As IMF Deputy Director Gita Gopinath said at the recent World Congress of the International Economic Association (IEA World Congress 2023), held in Medellin, Colombia, from December 11 to 15, “a second Cold War is at the horizon,” and the victims in this new tug-of-war “will be international trade, the fight against climate change, and the progress of developing countries.”

According to IMF Director General Kristalina Georgieva, at the moment the only ones who will benefit economically from the looming Cold War is the USA: “When we look at the recovery from Covid, only the United States has returned to a higher level of economic growth, and as these divergences widen, we must fear not only for the economy, but also for the security of the entire world,” Georgieva said in her speech at the Council on Foreign Relations.

After Georgieva, the second number at the IMF dotted all the i’s: “We are at a turning point. I would also like to ask: are we on the verge of a second Cold War? It seems so. Confirmation comes from historian Niall Ferguson, according to whom we are already there,” Gopinath said, highlighting that “the reason for this was the growing fragmentation between the ‘world superpowers’ – the United States, Russia, and China – due to political tensions and numerous episodes of trade wars.”

According to Gopinath, the financial losses that a second edition of the Cold War could cause around the world would be “truly devastating.” If the world economy splits into two or more hostile blocs and trade between these blocs is reduced to a minimum, losses could be estimated at approximately 2.5-3% of global GDP. With regard to the economic and social development of individual countries of the world, especially large losses are expected for developing economies with low incomes and for entire territories characterized by emerging economies.

“But depending on the ability of the economy to adapt,” Gopinath also noted, “the losses could even reach 7% of global GDP.” According to the latest estimates from the IMF itself and the World Economic Forum (WEF), global GDP is expected to reach $105 billion in 2023, and any losses that Gopinath announced could thus reach $7.350 billion. As economist Katya Stead noted, “this is about the same figure as the annual GDP of Great Britain and Germany combined, or more than three times the annual GDP of Russia.”

The process of deglobalization is constantly taking on alarming new forms amid the creation of coalitions and blocs. According to the report “Western banks in Russia shrink to Cold War levels as China rises,” prepared by Bloomberg together with the Raiffeisen banking group, “the presence of Western credit institutions in Russia has fallen to the level of the years of the first Cold War.”

If in 2021, on the eve of the outbreak of the armed conflict between Russia and Ukraine, “the potential risks of Western banks in Russia amounted to $119 billion, then in December 2023 this figure fell to less than $60 billion.” This is very close to the measly $40 billion in the late 1980s. “If you think about it,” wrote Gianluca Zapponini on Formiche.net, “in 2012, eleven years ago, trade turnover between foreign banks and Russia was almost $240 billion, so it goes without saying that the last two years have effectively closed an era.”

The spaces left free after the forced withdrawal of Western banks from Russia are occupied by Chinese financial institutions that “will play a role similar to the role of Western banks before the Ukrainian conflict, as an anchor of stability and a mediator of Russian foreign trade,” emphasized Raiffeisen analysts Ruslan Gadeev and Gunter Deuber, recalling that “in October 2023, 50% of Moscow-Beijing currency exchanges were settled in yuan.”

Worse yet, in addition to these divisions and erasures, a new Cold War threatens to interfere with the work that – as the recent COP 28 climate conference demonstrated – many people consider to be Planet Earth’s “highest priority,” namely finding solutions to limit global warming and climate change.

A recent analysis by the IMF itself found that fragmented trade in minerals critical to the transition to a green economy – lithium, copper, nickel, and cobalt – will make the energy transition much slower and more expensive. And this is because the reserves of these “strategic” minerals are concentrated in certain geographic areas of the world, from Latin America to China and Russia, and are not “easily renewable.” “Interrupting this green trade,” IMF analysts write, “will lead to large price fluctuations in international markets, followed by a sharp decline of investment in renewable energy.”