IMF Study Finds Trade Decoupling Has Not Harmed Global GDP, But India Aligns with US Bloc
SDG 8: Decent Work and Economic Growth | SDG 17: Partnerships for the Goals
Ministry of Commerce and Industry | Ministry of External Affairs
The IMF Working Paper titled ‘Playing with Blocs: Quantifying Decoupling’ uses a data-driven approach and a quantitative multi-country, multi-sector trade model to measure trade decoupling between 2015 and 2023. The study finds that while trade conflicts (like the US-China trade war and the Russia-West rupture) have caused a rewiring of global trade flows, the overall aggregate world trade-to-GDP ratio has remained resilient. This is because rising trade costs between blocs were largely offset by falling within-bloc trade costs and increased trade with unaligned countries. This indicates trade decoupling rather than deglobalization.
Key findings on decoupling and economic impact:
Real Income Impact: Contrary to the fear of “deglobalization,” model simulations suggest that the overall decoupling process between 2015 and 2023 has not reduced global GDP. The median country in the world actually experienced a modest 0.4%-0.6% increase in real income.
Bloc Alignment: Out of 187 countries analyzed, 43 aligned with the US bloc and 46 aligned with the China bloc. Unaligned countries saw larger income gains, averaging 0.8%.
Bloc Misalignment: The study found a modest amount of bloc misalignment: the median country in the US bloc would be better off switching to the China bloc, and vice versa. This suggests that geopolitical factors, rather than trade-driven economic interests, are dominating current bloc alignment.
Winners and Losers: Countries like Vietnam and Laos are major beneficiaries, gaining 6.9% and 3.5% in real GDP, respectively, consistent with anecdotal evidence of supply chains shifting away from China.
India-Specific Details:
Bloc Classification: India is classified as a country that has moved toward the US bloc in the analysis period (2015-2023). This indicates that its trade costs with the US have decreased while its trade costs with China have increased.
Economic Impact: While India experienced a marginal real income gain during the decoupling period, the study’s general findings suggest that India might benefit economically from switching to the China bloc.
What is Decoupling in Trade? Decoupling, in the context of this study, refers to the systematic change in the sources and destinations of cross-border trade flows, driven by shifts in bilateral trade costs that lead countries to align with major economic powers, such as the US and China.
Policy Relevance
The paper provides a nuanced policy outlook, indicating that the immediate economic costs of decoupling are lower than feared, largely due to compensatory trade within blocs and with unaligned nations. However, the finding that India is aligned with the US bloc, coupled with the systemic “misalignment” for the median country, suggests that India’s trade policy must critically evaluate whether its geopolitical alignment maximizes its long-term economic interests. This misalignment indicates that foreign policy considerations, not pure trade benefits, may be dictating the pattern of international commerce.
Follow the full paper here: Playing with Blocs: Quantifying Decoupling