Gao Zhanjun: The Costs of Trade Fragmentation (AI Translation)

【周刊提前读】高占军专栏：贸易碎片化的代价

[para. 1] At the G20 Finance Ministers and Central Bank Governors' Meeting concluded on July 18, 2025, Gita Gopinath, First Deputy Managing Director of the International Monetary Fund (IMF), addressed the considerable uncertainties and persistent downside risks facing the global economy. Despite these challenges, she noted continuing resilience thus far. Gopinath signaled a possible upward revision in the IMF's global growth forecast scheduled for late July, based on three main reasons: strong evidence of preemptive trade actions ahead of US tariff hikes and some trade diversion; reductions in average tariffs and an improved global financial environment following certain trade agreements; and cooling demand along with falling energy prices, suggesting a sustained decline in inflation [para. 1].

[para. 2] Similarly, a World Bank report released in early July echoed the IMF's conclusion, stating that "global trade has so far remained resilient." However, the World Bank also highlighted a sharp slowdown in trade, mainly attributed to the cumulative effects of tariff increases and rising policy uncertainty. Their projections see global trade growth decelerating from 3.4% in 2024 to 1.8% in 2025, a downgrade of about 1.3 percentage points from their January forecast. The report warns that growing tendencies toward trade restrictions among countries could provoke broader spillover effects, prompting third-party markets to adopt their own restrictions and further suppressing trade flows and global demand [para. 2].

[para. 3] Beyond these short-term challenges, the World Bank underscores the issue of global supply chain restructuring as a long-term source of uncertainty and heightened downside risks—a viewpoint with which the article’s author agrees. Over the past 30 years, the fragmentation of production across national borders became a trend, with corporations organizing offshore production and outsourcing components and services worldwide. Terms like value chain fragmentation, offshoring, and global production sharing became mainstream, with about 50% of world exports originating from supply chain trade. Still, rising geopolitical tensions and a surge in policies focused on supply chain resilience and national security are causing trade and investment to increasingly fragment along geopolitical fault lines, intensifying the trend of "trade fragmentation" [para. 3].

[para. 4] The cost of global trade fragmentation is significant, reducing efficiencies from specialization, limiting scale economies, and constraining competition. The ability for trade to prompt industry reconfiguration and productivity gains is undermined, while reduced trade and cross-border investment also weaken knowledge transfer. As seen with Brexit’s negative impact on the UK economy, this fragmentation is more acute now, with the global trade-to-GDP ratio rising from 16% during the early Cold War to 45% today [para. 4].

[para. 5] Estimates of the economic cost of such fragmentation vary. An IMF study suggests that under mild scenarios with low adjustment costs, global GDP losses could be 0.2%, but in extreme scenarios with limited adjustment capability, losses could reach up to 7% of global GDP. For foreign direct investment, if the world divides into US- and China-centered blocs, with some countries remaining nonaligned, the fragmentation could cause long-term global GDP losses of around 2% [para. 5].

[para. 6] With mounting trade fragmentation and pressures to reorganize global supply chains, China’s status as the “world’s factory” is under threat. Previously occupying the core of global supply chains due to low costs, large market, integratable resources, and favorable geography, China now faces challenges. China's share of US imports fell by 8 percentage points from 2017 to 2024, dropping to 7.1% in May 2025, the lowest since 2001, partly offset by rerouted trade and investment through third countries like Mexico and Vietnam—major recipients of both growing US import shares and Chinese outward direct investment [para. 6].

[para. 7] Global supply chains are sticky and hard to recalibrate; once fragmentation takes hold, reversing it is extremely difficult. Preserving supply chain stability is essential for China. Besides resolving trade disputes through negotiation, China needs to further improve its investment environment, protect intellectual property, expand market access, enhance regulatory efficiency, cut import tariffs on intermediate goods, and take steps toward industrial upgrading [para. 7].