IMF Working Paper on Reshaping Global Commerce: Navigating Geoeconomic Fragmentation in MENA And CCA and India as a "Neutral Connector"
SDG 9: Industry, Innovation and Infrastructure | SDG 17: Partnerships for the Goals | SDG 8: Decent Work and Economic Growth
Ministry of Finance | Ministry of Commerce and Industry | Ministry of External Affairs
The IMF Working Paper titeld "‘Unlocking MENA and CCA Trade in a Fragmented World’ investigates the profound impact of geoeconomic fragmentation on trade flows within the Middle East and North Africa (MENA) and Caucasus and Central Asia (CCA) regions. Global trade interventions have surged by 70 percent since 2019, doubling for these regions as security threats and geopolitical shifts reshape established economic paradigms. The analysis explores three illustrative scenarios ranging from targeted trade restrictions between major powers to a severe three-bloc global arrangement where non-aligned nations face significant output risks.
Key findings from the fragmentation scenarios include:
Trade Diversion Gains: Under limited fragmentation, CCA and MENA economies could see modest export gains (0.5% to 1%) as they pick up trade diverted from larger sanctioned economies.
The “Neutral Connector” Advantage: By maintaining neutrality, these regions could act as intermediaries between opposing blocs, potentially boosting exports by 2-3 percent and GDP by up to 0.4 percent.
Severe Bloc Risks: In a full three-bloc world, many countries could face severe losses; MENA nations outside the GCC are projected to see a 7.4 percent drop in exports.
Policy Levers for Resilience: Reducing trade restrictions by just 20% relative to advanced economies could boost regional exports by over 15 percent, effectively neutralizing the negative shocks of fragmentation.
What is “Geoeconomic Fragmentation” in the context of international trade? Geoeconomic fragmentation refers to the policy-driven reversal of global economic integration, where trade, investment, and financial flows are increasingly restricted along geopolitical lines. This phenomenon often manifests through “friend-shoring,” where nations prioritize trade within a bloc of politically aligned partners, resulting in higher trade costs, disrupted supply chains, and significant welfare losses for countries caught between opposing economic alliances.
Policy Relevance
India’s strategic positioning and deep trade ties with both the MENA and CCA regions make these findings critical for national economic security:
Strategic Neutrality as a growth driver: Similar to the paper’s findings on “neutral connectors,” India’s balanced diplomatic stance allows it to serve as a vital trade bridge, potentially mitigating the 6.3% output loss associated with global bloc decoupling.
Logistics and Infrastructure: India’s involvement in the Middle Corridor and the India-Middle East-Europe Economic Corridor (IMEC) is validated by the paper’s recommendation that infrastructure upgrades can boost regional exports by 7-8 percent.
Diversifying Energy and Trade: As the EU substitutes Russian energy with MENA hydrocarbons (which saw a 30% share increase), India faces heightened competition for regional resources, necessitating more agile energy diplomacy.
Regulatory Alignment: To leverage trade diversion, India must address its own “trade enabler” gaps in regulatory quality and non-tariff barriers, where the region currently lags behind international benchmarks.
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