Geopolitical tensions and economic fragmentation: a trade policy response

A stylized image of dried and cracked soil representing fragmentation

The policy challenge. At a time when effective global co-ordination and action are desperately required, developments on the ground present several challenges. The shock from the COVID-19 pandemic elicited protectionist sentiment in some areas and continues to weigh on the global economy, despite the heroic response by the medical community. 

The war in Ukraine is tremendously costly to the adversaries. It has also proven very costly to third parties, especially those dependent on food and energy supply from the region. Tensions and bilaterally targeted trade restrictive actions by the US and China continue to the detriment of the two parties, with many others indirectly affected as well.

G20 leaders adopted a broadly conciliatory and constructive tone at their Bali summit (15-16 November 2022), concluding with a roughly 20-page Leaders’ Declaration. That document included concrete actions to be taken in areas such as macroeconomic and financial stability, supply chain resilience, food and energy security, and support for development. Yet, real systemic risks persist with respect to growing economic fragmentation that is aggravated by the war in Ukraine and geopolitical tensions between China and the United States. 
Security considerations are spilling over to affect the international economy. The multilateral system remains distressed with respect to trade and investment.

Some regional trade agreements such as the CPTPP and RCEP have a comparatively broad scope and complement trade policy efforts at the multilateral level, though still with gaps and limitations.

The G20 Leaders’ Declaration acknowledges the challenging situation, pointing to fragmentation in global health system governance; resilience shortfalls in areas such as food, finance, and the digital economy; and the compounding effect of geopolitical tensions on matters such as the climate emergency and energy crisis. A wide-ranging set of actions is endorsed. A central role for trade and investment is recognised as part of the solution. There is an affirmation of the importance of the multilateral trading system, but a statement of strategic approach to trade and investment is lacking. The G20 remains pragmatically oriented towards a more restricted mode of operation, building up its program from specific actions.

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Carlos A. Primo Braga is an Adjunct Professor, Fundação Dom Cabral, Brazil; Visiting Professor at IMD, Switzerland and at El Colegio de México; and former Director, Economic Policy and Debt, The World Bank.

Douglas Lippoldt is a non-resident Senior Fellow at the Centre for International Governance Innovation (CIGI, Canada) and former Chief Trade Economist, HSBC Global Research.

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