The International Monetary Fund warned in its report that “companies and policymakers around the world are exploring several ways to make their supply chains more flexible by moving production home or to trusted countries, which will also lead to fragmenting foreign direct investment.”
Further, the IMF pointed to recent bills adopted amidst the backdrop of rising tensions between the U.S. and China, such as Washington’s Chips and Science Act.
Recently, Japan also imposed its own set of restrictions on 23 types of semiconductor manufacturing equipment, joining U.S. efforts to restrict China’s ability to make ultramodern chips.
The American Chamber of Commerce in China also conducted a survey recently that similarly exhibited a shift of foreign direct investment away from China. For the first time in 25 years, less than half of its respondents ranked China as a top-three investment priority.
Later, the economists at the IMF said that money is now flowing into what they determined were “geopolitically close countries.” However, the rise of “friend-shoring” could hurt less developed markets the most, the firm said.
“Emerging markets and developing economies are particularly affected by reduced access to investment from advanced economies, due to reduced capital formation and productivity gains from the transfer of better technologies and know-how,” Jae-bin Ahn and other IMF economists included in the report.
Mainly, the downshift has occurred because tensions between China and the United States have increased. However, after a recent meeting between Kevin McCarthy, U.S. House Speaker, and Tsai Ing-wen, Taiwan’s President, in California, Beijing made underlying threats, pledging to take “resolute actions” in retaliation to the “provocation.”
Moreover, the IMF economists also added that developing economies are more exposed to this shift in foreign direct investment as “they rely more on flows from more geopolitically distant countries.”
“Even if more powerful countries garner the benefits they seek through increasing tensions, those gains could be partially countervailed due to spillover from weaker external demand,” the IMF warns.
“A fragmented world is likely to be a poorer one,” the economists added.
Vulnerable to shocks
Later, the IMF argues that while “reconfigured” supply chains according to geopolitical alliances may benefit a country’s national security interests and safeguard an upper hand against competitors, the consequences might occur.
“Friend-shoring to existing partners will often reduce diversification and make countries more vulnerable to macroeconomic shocks,” IMF economists wrote.
In the previous year, the organisation also argued for substantial supply assortment in global trade, saying that a “more diversified global value chain could help lessen the impact of future shocks.”
The organisation also revisited that argument, saying that even for developed economies, international firms surfing competition “spurs domestic enterprises to be more productive.”
They warned that policy variability should be minimised, as it “amplifies losses from fragmentation.”
“In a fragmented world with heightened geopolitical tensions, investors may worry that nonaligned economies will be forced to choose one bloc or the other in the future, and such uncertainty could intensify losses,” the IMF concluded in their note.
- Published By Team Genuine Reporter