Geoeconomic Fragmentation: What’s at Stake for the EU

Chikako Baba, Ting Lan, Aiko Mineshima, Florian Misch, Magali Pinat, Asghar Shahmoradi, Jiaxiong Yao and Rachel van Elkan

No 2023/245, IMF Working Papers from International Monetary Fund

Abstract: Geoeconomic fragmentation (GEF) is becoming entrenched worldwide, and the European Union (EU) is not immune to its effects. This paper takes stock of GEF policies impinging on—and adopted by—the EU and considers how exposed the EU is through trade, financial and technological channels. Motivated by current policies adopted by other countries, the paper then simulates how various measures—raising costs of trade and technology transfer and fossil fuel prices, and imposition of sectoral subsidies—would affect the EU economy. Due to its high-degree of openness, the EU is found to be exposed to GEF through multiple channels, with simulated losses that differ significantly across scenarios. From a welfare perspective, this suggests the need for a cautious approach to GEF policies. The EU’s best defence against GEF is to strengthen the Single Market while advocating for a multilateral rules-based trading system.

Keywords: Geoeconomic fragmentation; cross-border restrictions; trade; innovation; multinational production; energy; European Union; Single Market; EU economy; EU integration; EU foreign direct investment linkage; EU State aid; Manufacturing; Foreign direct investment; Fuel prices; Comparative advantage; Exports; Global (search for similar items in EconPapers)
Pages: 40
Date: 2023-11-30
New Economics Papers: this item is included in nep-eec, nep-eur and nep-int
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