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Fragmenting trade blocs, declining dollar use threaten global growth, warns Gita Gopinath
"The pace at which trade between geopolitical blocs is declining is ahead of where it was in 1947, at the start of the Cold War," Gopinath said
IMF First Managing Deputy Director Gita speaks about risks to global trade and the eroding dominance of the US dollar at Stanford University / Image- hoover.org
The rise of trade blocs and a gradual move away from the U.S. dollar as the world's reserve currency pose significant risks to future economic prosperity, according to Gita Gopinath, the first deputy managing director of the International Monetary Fund (IMF).
The Indian-origin economist made the observations while delivering a presentation hosted by the Stanford Institute for Economic Policy Research in conjunction with the Stanford King Center on Global Development and the Hoover Institution at Stanford University on May.7.
"What we've seen in the last several years is that global trade relations are changing in ways we haven't seen since the end of the Cold War," Gopinath said. "Increasingly countries are guided by economic and national security concerns about who they trade with and who they invest in."
Her presentation shed light on the profound implications of hardening trade by citing data showing a decline in trade between countries from different geopolitical blocs. Trade between "geopolitically distant" countries is now 12 percent lower than between members of the same bloc.
This trend, coupled with a growing number of trade restrictions – countries imposed over 3,000 new restrictions annually between 2020 and 2023, a tripling of the pre-2019 rate – paints a concerning picture, Gopinath explained.
"The pace at which trade between geopolitical blocs is declining is ahead of where it was in 1947, at the start of the Cold War," Gopinath said. "But back then, global trade as a percentage of GDP was 16 percent. Now it is 45 percent."
Adding to these concerns, Gopinath noted a slight but steady decline in the dominance of the US dollar as the world's primary reserve currency. The share of central bank foreign currency reserves held in dollars has dropped from 70 percent to 60 percent since the early 2000s, with the Chinese-led trading bloc increasingly using the yuan for transactions.
The economist warned that if these trends of trade decoupling and de-dollarization continue, the global economic cost could be substantial. "If it becomes a very serious decoupling scenario, it could cost up to 7 percent of GDP," she asserted.
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