US-China Rivalry Risks Cold War II, Warns IMF Official

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The International Monetary Fund (IMF)’s first deputy managing director has warned of the risk of Cold War II. Noting that in the Cold War, it was the U.S. and the Soviet Union, the IMF official stressed that now it is the U.S. and China. “If fragmentation deepens, we could find ourselves in a new Cold War,” she cautioned.

IMF Official Warns of Cold War II

International Monetary Fund (IMF) First Managing Deputy Director Gita Gopinath discussed “Cold War II” in her speech on Monday at the 20th World Congress of the International Economic Association in Colombia.

The IMF official began by stating that she believes we are “at a turning point.” She then discussed whether we are “on the brink of Cold War II,” citing historian Niall Ferguson’s argument that it has already begun. She analyzed the “parallels and differences between the Cold War and today” to explore this question, adding:

In the Cold War it was U.S. and Soviet Union, now it is U.S. and China. But the stage on which these forces are unleashed is fundamentally different along several dimensions.

“To start, the degree of economic interdependence between countries now is higher, as economies have become much more integrated into the global marketplace and through complex global value chains. Global trade to GDP is now 60 percent compared to 24 percent during the Cold War. This will likely raise the costs of fragmentation,” the IMF official detailed. “There is also greater uncertainty on the bloc with which countries may choose to associate. Within-country swings in the ideology of the political leadership have increased compared to the Cold War era and make it difficult to pin down allegiances. This uncertainty can further raise costs.”

She opined: “If we descend into Cold War II, knowing the costs, we may not see mutually assured economic destruction. But we could see an annihilation of the gains from open trade. Ultimately, policymakers must not lose sight of those gains. It is in their — and everyone’s — best interest to advocate strongly for a multilateral rules-based trading system and the institutions that support it.”

While the IMF official noted that “there are no signs of broad-based retreat from globalization,” she cautioned that “fault lines are emerging as geoeconomic fragmentation is increasingly a reality.” Gopinath warned:

If fragmentation deepens, we could find ourselves in a new Cold War.

“The economic costs of Cold War II could be large. The world has become much more integrated, and we face an unprecedented breadth of common challenges that a fragmented world cannot tackle,” she opined. “After all, many emerging and developing countries face the biggest losses from a fragmented world, and while some benefit in the early stages of fragmentation, all lose in a full-blown Cold War.”

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