RPT-COLUMN- 'Fragmentation' the buzzword - and what it costs: Mike Dolan
(Repeats column first published on Wednesday. The opinions expressed here are those of the author, a columnist for Reuters.)
By Mike Dolan
LONDON, April 5 (Reuters) - As "fragmentation" of politics and economics becomes the new buzzword for a world that appears to be splintering into blocs, the related costs of the new order are only now being totted up.
The bank stresses of March have tended to obscure a further souring of big power relations this year as global investors navigate crisis after crisis and struggle to prioritize competing geopolitical and even "geoeconomic" narratives.
Russia's self-inflicted isolation from major G7 and European Union economies since it invaded Ukraine over a year ago has given way to even more economically significant tensions between the West and China over Beijing's explicit support for Moscow and sabre rattling on both sides surrounding Taiwan.
Wednesday's planned meeting between U.S. House Speaker Kevin McCarthy and Taiwan President Tsai Ing-wen in California is yet another episode in a rapidly freezing bilateral atmosphere.
But the International Monetary Fund on Wednesday went some way to blending the political and economic costs this week, modelling the hit to cross-border finance and investment of major nations at loggerheads and the formation of political blocs.
Measuring geopolitical tension via countries' voting behaviour at the United Nations General Assembly, the IMF estimated that a divergence akin to what has happened to Sino-U.S. relations since 2016 could cut cross-border portfolio investment flows and bank credit by 15%.
Along with a threat of sudden reversals of foreign investor flows, it said "macro financial stability risks" related to such tensions included sharp increases in funding costs for weaker banks, associated damage to credit provision and longer-term volatility from reduced international diversification.
Corporate rethinking of foreign direct investment (FDI) - bricks-and-mortar developments overseas as well as mergers and acquisitions - would make the hit even scarier. The IMF cited data showing FDI had already more than halved from 3.3% of world output in the first decade of this century to just 1.3% in the four years since 2018 and that was just a taster of the problem.
"A fragmented global economy is likely to be a poorer one," it said, with FDI flows already increasingly concentrated between politically aligned countries - so-called friend shoring.
"If geopolitical tensions were to increase and countries were to move farther apart along geopolitical fault lines, FDI is likely to become more concentrated within blocs of aligned countries," it said.