Euronews sits down with Gita Gopinath, the first deputy managing director of the International Monetary Fund, to talk trade wars, net zero, and national security.
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00:00 [indistinct chatter]
00:03 Why are economists speaking about...
00:14 and should we be worrying about it?
00:16 After the COVID-19 pandemic and Russia's invasion of Ukraine,
00:21 countries have become increasingly worried about resilience,
00:24 about the security of their supply chains, about national security.
00:28 So trade policy is now being determined increasingly by concerns on security.
00:34 And we have seen a big increase in the number of restrictions that are being placed on trade,
00:39 sometimes the provision of subsidies, sometimes export controls.
00:43 The question is whether we are seeing anything in the data on trade flows
00:47 and whether we are seeing different directions in which trade is moving.
00:51 And the answer is yes, we are seeing that.
00:54 Now, let's take the very stark example of the European Union and energy.
00:59 After Russia's invasion of Ukraine and after Russia shut off gas supply to the region,
01:03 we saw this big increase in energy prices.
01:06 And appropriately, the European Union moved its supplies, where to buy its energy from.
01:12 So while the European Union continues to depend on the rest of the world for its energy,
01:17 it's coming from different places.
01:19 It's coming from the US and it's coming from Norway and from other countries.
01:23 And something similar is happening at a smaller scale, but more generally for global trade,
01:27 which is that while overall trade is not really in the world's share of GDP,
01:32 has not changed that much, where countries are buying from is shifting around.
01:37 So one of the exercises we did was to look at trade within a block of countries
01:42 that we view as being more politically aligned
01:45 and comparing that to trade across a block of countries which are less politically inclined.
01:50 And what we've seen since the war in Ukraine,
01:53 that trade within block trade is growing 1.5 percentage point more than between block trade.
02:00 So this phenomenon is happening.
02:02 It's still early stages, but we are certainly seeing it now in the data.
02:06 [Applause]
02:24 The worst case scenario would be if countries, say, decouple into two blocks
02:30 and there's literally no trade taking place between those two blocks.
02:33 We've modeled what the effect of that would be,
02:36 and that would reduce global GDP, global income, global output, by around 7%.
02:42 That is a very large number. It's like losing the economies of Japan and Germany.
02:47 So the cost can be very large because we are no longer relying on buying from the cheapest source in the world,
02:54 but we're trying to move production to our friends or move production home.
02:58 What would be even worse, of course, is if countries decide to do everything by themselves,
03:03 so not even rely on friends but just do all the production at home, the cost would be higher.
03:07 So this is a very costly place to go to.
03:10 Now, we are not there yet, and I think countries and governments are making the effort to prevent such a slide
03:17 so that the whole world doesn't end up in a bad place, but we have to be very careful.
03:21 In the European plan, the federal government has come a long way in ensuring that warrants the additional upfront economic costs.
03:30 And there are some medical...
03:31 Europe is in an interestingly unique place.
03:34 So first, if I think of the European Union, it is quite vulnerable to these fragmentation risks
03:41 because it is very open in terms of trade.
03:44 It's actually more open than even China. It's more open than the US, too.
03:48 It's also very open in terms of foreign direct investment.
03:51 So its external dependence is quite high.
03:54 That makes it vulnerable, but at the same time, it also is uniquely prepared to deal with fragmentation risks.
04:01 And the reason is that unlike the US, which is heavily concentrated on innovation,
04:06 and China, which is heavily concentrated on manufacturing,
04:09 the European Union, because it has a mix of advanced economies and emerging and developing economies,
04:14 it has both manufacturing and innovation.
04:17 And so it's able to rebuild supply chains within the European Union much faster.
04:22 Now, that's not going to happen automatically. You need the right policy investments.
04:26 But if they do that, that would help Europe, for instance, build resilience.
04:45 For all of us, we have benefited from a highly integrated global world
04:51 because that has made lots of goods cheaper for us to buy.
04:57 It has lowered the cost of living, and that has helped all of us.
05:00 Now, of course, I think countries are appropriately concerned about resilience.
05:05 They're appropriately concerned about security issues, given what we've seen over the last few years.
05:10 Therefore, it is important for policy to focus on resilience, too.
05:14 It's just important to make sure that you don't end up going down a slippery slope
05:18 where you have so much decoupling in the world that it just makes everything so much more expensive for all of us
05:24 and makes us worse off.
05:26 In fact, that would be a world also where we are all less safe,
05:30 because if we only depend on production at home and suppose a factory goes bust,
05:35 then that has an even bigger negative effect on our welfare
05:39 than if we were to rely on many trading partners.
05:42 So there are risks involved in that.
05:44 The benefits of having a deeper single market is that would bring along more capital for the EU
05:50 to invest in very important transitions that the European Union is going through,
05:54 including the green transition, including digitalization.
05:57 That requires a lot of investment.
05:59 So if you have the capital markets union, you have the banking union,
06:03 that will release the capital that's needed to be able to have a lot more increase in productivity
06:09 to make these green transition happen, and that's good for everybody.
06:13 I think it would absolutely help all countries, including Germany,
06:17 if there was a banking union, if there was a capital markets union,
06:21 because it would reduce also the cost of funds for firms in all the different regions of the European Union.
06:27 It's much more easier for capital to go where the returns are highest.
06:33 For instance, if you look at the green transition, you want to be able to do that in the most cost-effective way.
06:38 So for that, you want investment to happen where you get the biggest bang for the buck,
06:42 which is you get the most amount of carbon emission reduction by investing.
06:46 That doesn't happen automatically.
06:48 If you have more integrated markets, you get that kind of movement of capital and investment.
06:53 That's absolutely critical.
06:55 What's your main takeaway in that?
06:58 You do know I haven't stepped into the conference yet.
07:01 [inaudible]
07:09 I think everybody agrees, every country agrees, that it is important to invest in climate mitigation
07:16 and for many countries, in climate adaptation.
07:19 It's the one planet we have.
07:21 We need to make sure that we are able to preserve it for us and for future generations.
07:25 So that is a common understanding.
07:27 The question is what kinds of policies will make that transition happen.
07:31 There are two sets of policies that countries are relying on that could have implication for global trade.
07:37 One is in terms of providing subsidies to their companies, green subsidies, which help with the green transition.
07:44 And the other is something, for instance, the European Union has, which is the carbon border adjustment mechanism,
07:51 which is to the fact that carbon prices are higher in the European Union than in the rest of the world.
07:57 You want to be able to offset the impact on European firms and also make sure that you're not basically ending up
08:04 with importing from countries which are not good in terms of carbon emissions.
08:09 So what's the risk here?
08:11 I think the risk is on the subsidy side.
08:14 You can end up impeding trade.
08:16 And let me give you the specific example of within the single market.
08:19 Now, we have state aid that is being done in some countries that have more budgetary money
08:28 to be able to provide these kinds of subsidies.
08:31 Then that will disadvantage companies in other countries whose governments don't have the budgetary space
08:37 to provide that kind of support.
08:39 That affects the single market.
08:41 So that's one thing one has to be very careful about.
08:44 Similarly, with these border adjustment taxes, you have to make sure that this is compliant with global international trading rules.
08:52 And that means convincing your trading partners that this is not you trying to protect your industry,
08:58 but it is about making sure that globally we have lower emissions in the world.
09:04 And these are the kinds of actions that are required to make sure that the climate transition policies
09:10 don't end up inadvertently triggering some sort of trade war.
09:15 Thank you so much, Lisa.
09:16 Thank you.
09:17 Thank you so much.
09:18 [Whoosh]