Jay Sapsford Jay Sapsford
Senior Vice President, Global Risk Analysis, U.S. Chamber of Commerce

Published

October 21, 2024

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When the leadership of the IMF and World Bank descends on Washington today for the start of a week-long annual plenary, the meetings will tackle the usual economic forecasts, debt alleviation proposals and policy reviews. 

One relatively new bullet on the agenda: Fragmentation.

In policy circles, fragmentation has become a buzzword over this past year of disruption, war, tariffs, and sanctions. The IMF has warned such geopolitical concerns are overtaking economic incentives as the driver of trade and investment flows and sparking the creation of trade blocs of like-minded allied nations.

Russia, for example, will host this week the BRICS group of nations, which has several new members. The meeting—coinciding with the Washington Bretton Woods confab—underscores how geopolitics has some of the world’s most dynamic economies testing new economic alliances.

This is the IMF’s theory: When trade, investment or supply-chain decisions favor security concerns, commerce tends to ‘fragment’ into flows among allies and divert from rivals. The allies may—or may not—offer the best returns or lowest-cost production. Efficiencies tend to suffer. Costs go up. 

The potential economic costs of fragmentation will be one of the risks highlighted in Washington this week after an otherwise celebratory year: This is the 80th anniversary of the 1944 Bretton Woods agreement, which created the IMF and World Bank and thus contributed to global economic stability and decades of prosperity.

The U.S. Chamber shares the IMF concerns over any risk to that prosperity—whether in the U.S. or around the world—and to that end, our members can find specific policy prescriptions in our Growth and Opportunity Imperative launched earlier this year.

Not all see an imminent threat from fragmentation. The U.S., for example, says it has many friends, and “what we’re really talking about is diversification,” said Treasury Under Secretary Jay Shambaugh.

“I don’t think it’s bad, say, for Vietnam or India or Mexico to see some production rotate out of China,” said Shambaugh in a recent interview.

Today, trade isn’t declining by much, if at all. But it is shifting, and the fear is those who stand to lose the most are often low-cost producers in developing countries, or so goes the IMF theory. First Deputy Managing Director of the IMF Gita Gopinath warns that in the worst-case scenario such, fragmentation could cost as much as 7% of global GDP. 

That would be equal to the French and German economies combined. “If the trend continues, we could see a broad retreat from global rules of engagement,” she said at a recent speech, “and, with it, a significant reversal of the gains from economic integration.”

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About the authors

Jay Sapsford

Jay Sapsford

Jay Sapsford is Senior Vice President for Global Risk Analysis and helps lead the Chamber’s efforts in assessing geopolitical and economic risks that impact the business community. He plays a key role in identifying global trends, risks, and opportunities on behalf of the Chamber’s membership.

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