New documents show Finance Minister Nicola Willis spent her trip to the United States discussing the political risks to global trade

As inflation comes under control around the world, policymakers are turning their attention to the next big risk for the global economy: populist politics. 

Finance Minister Nicola Willis travelled to Washington DC in April, ahead of delivering Budget 2024, and came back convinced the New Zealand Defence Force should get more funding. 

Whether or not she delivered that is somewhat up for debate. The lumpy nature of capital investment means the percentage of GDP fell this year, despite a bigger operating budget.

But a newly-released document, reporting back to Cabinet about the trip, reveals how prominently political risks featured in the Finance Minister’s conversations. 

Almost half of her 13 meetings with other economic leaders centred on discussions about geopolitical threats to the world economy, which was otherwise recovering well. 

The Spring Meetings, she said, took place in a “context of growing geopolitical fragmentation and while countries approach the ‘last mile’ in the fight against inflation”. 

“While the global economy is performing better than expected, my meetings focused on risks to the global outlook, particularly economic fragmentation, protectionism, and geopolitical instability caused by conflicts between states”.

As is always the case with international engagements, the report didn’t detail any specifics about the conversations. It just lists who she met with and the topics discussed. 

She “shared concerns about growing geopolitical tensions and the potential impacts of fragmentation for small advanced economies” with Singapore’s second finance minister.

And, attended a dinner with European finance ministers to discuss the economic impacts of military conflicts, particularly Russia’s invasion of Ukraine, and other geopolitical tensions. 

Two leaders from the International Monetary Fund met with Willis, both sharing a similar message: the global economy is doing well but under threat from political fallout. 

Krishna Srinivasan, the Asia and Pacific director, said the global economy had been buoyed by strength in the US and emerging market economies. But there were downside risks from sticky inflation, slow growth in China, and unspecified “geopolitical tensions”. 

Pierre-Olivier Gourinchas, the IMF’s chief economist, gave his own overview of the global economic outlook noting: “the economy is improving but politics (and geopolitics) are the main downside risks”. 

Willis said her discussion with the chief economist was focused on the potential spill overs of economic fragmentation. She also met with US Treasury Secretary Janet Yellen and talked about her trip to China.

Sadly, the document sheds little light on what specific geopolitical risks to worry about but we can read between the lines.

Fractured trade

Srinivasan wrote an opinion column in January on similar themes to his discussion with Willis in Washington DC in April. Inflation was cooling in Asia but other risks were emerging. 

One of these was “geopolitical fragmentation” which could hit the Asia region harder than others due to its deep integration into global trade.

“We already see evidence of negative effects in the form of longer and less efficient supply chains. The threat of higher shipping costs reinforces risks to trade,” he wrote. 

Asian policymakers should use this window of opportunity to improve the resilience of their economies by paying down debt to make sure there is a fiscal buffer for future shocks. 

(Before you ask: yes, New Zealand is an Asian economy according to former Prime Minister Jim Bolger, at least).

The "geopolitical fragmentation" mentioned by the IMF refers to the intense rivalry between the United States and China, as both nations try to become the world's leading superpower.

US policymakers have been imposing tariffs and trade restrictions on China to protect American industries from perceived unfair trade practices and intellectual property theft.

Meanwhile, China has been expanding its global influence through the Belt and Road Initiative, increasing its exports, and investing in advanced technologies to reduce dependency on Western countries.

This has ushered in a new era of deglobalization, with various governments imposing tariffs, adopting industrial policies, and reconfiguring trade routes.

In a May speech, the IMF’s deputy managing director said global trade remained fairly stable and connected for now, but there were signs of increasing fragmentation.

Trade growth between US-leaning and China-leaning countries has slowed significantly, falling nearly 5 percentage points in 2023 compared to the years prior, while growth within those blocs only decreased 2 percentage points.

There are fears that a second Donald Trump presidency in the US could accelerate this fragmentation and kick-off a trade war that harms global productivity and growth. 

Larry Summers, a former US Treasury Secretary, told attendees at a conference in February that financial markets may be underestimating the global fallout of populist policies.  

“The world is potentially headed into a period where there is less of a sense of what the order is going to be and therefore more risk of disorder, chaos, and associated suffering,” he said. 

Trump has touted plans to impose a 10% tariff on all imports into the USA and significantly larger ones on imports from China. 

This would be bad enough on its own but would likely prompt retaliation from other trading partners which could ricochet across supply chains in expensive ways. 

The IMF worries this will significantly weigh on global economic activity and productivity, if it happens. Others worry trade wars could be precursor to actual wars. 

There isn’t much New Zealand can do to prevent fragmentation. The only policy response is to prepare for supply shocks and firm up trade links with other countries eager to keep trading.