Stanford (CA) — The fragmentation of trade into geopolitically aligned blocs and the slow creep away from the US dollar as world’s leading reserve currency pose enormous risks for future economic growth, Gita Gopinath, the first deputy managing director of the International Monetary Fund (IMF), told an audience at Stanford University on May 7.

Gopinath said national security concerns are guiding states away from trading with others they view as “geopolitically distant.”

“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 was hosted by the Stanford Institute for Economic Policy Research, in collaboration with the Stanford King Center on Global Development and the Hoover Institution.

Gopinath showed the audience data indicating that trade between three blocs of politically aligned countries—the United States and its partners; China, Russia, and the wider BRICS (Brazil, Russia, India, China, South Africa) group; and a third nonaligned group—is declining.

She said trade between countries considered “geopolitically distant” is now 12 percent lower than between countries of the same geopolitical bloc. Each year between 2020 and 2023, countries added 3,000 or more separate trade restrictions on one another, more than triple the annual amount they added in 2019. She said 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.

“But back then, global trade as a percentage of GDP was 16 percent. Now it is 45 percent,” Gopinath said.

On top of the hardening of trade barriers, there is a slight but noticeable decline in use of the US dollar as a primary reserve currency worldwide. While 70 percent of central bank foreign currency holdings used to be made up of dollars, that proportion has fallen to 60 percent since the early 2000s.

The Chinese-led trading bloc is increasing its use of transactions denominated in the yuan instead of the dollar. If these trends continue, Gopinath said, the cost  of both trends continuing, in terms of diminished future economic growth for the entire globe could be tremendous.

“If it becomes a very serious decoupling scenario, it could cost up to 7 percent of GDP,” she said.

She said opposing blocs of countries need to keep communication lines open, be pragmatic, and focus on areas of common interest, such as climate change, to ensure that global trade continues to bring benefits to every corner of the globe.

Sitting in the front row for Gopinath’s talk was John B. Taylor, senior fellow in economics at both the Hoover Institution and the Stanford Institute for Economic Policy Research.

Taylor asked Gopinath why the IMF shouldn’t aim for every economy on earth to have a 2 percent annual inflation target, similar to the US Federal Reserve target.

“Firstly, it’s pretty cool to be talking to the person who came up with the Taylor rule,” Gopinath said before answering. She said emerging economies typically have higher inflation targets than Global North states because they are more vulnerable to import supply cost shocks, among other factors.

“As of now, this is the time to get to [an inflation] target,” Gopinath said. “This is not the time to start moving targets. When you’re in that place then you can have these debates about where the target should be.”

Michael McFaul, senior fellow at the Hoover Institution, director of the Freeman Spogli Institute, and Stanford professor of political science, asked Gopinath how the IMF engages competitor organizations such as the New Development Bank and the Asian Infrastructure Investment Bank.

“We have cordial relations with everybody,” Gopinath said. “In a sense, if there are more sources of funding available to the world, I think that’s fine, but what we always push for is that whatever lending is done, it is done transparently.”

She added that even though geopolitics is becoming more of a barrier to trade and something she must pay ever more attention to in her role at the IMF, at the end of the day, most of the world’s countries are still part of the IMF.

“We’ve been able to do our jobs. Let’s hope it stays that way.”


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