IMF says U.S-China tensions could cost the world about 2% of its output

The International Monetary Fund said in a Wednesday report that global tensions could disrupt overseas investment and eventually lead to a long-term loss of 2% of the world’s gross domestic product.

Companies and policymakers across the globe are exploring ways to make their supply chains more resilient by “moving production home or to trusted countries,” the IMF warned in its report, adding that this will lead to fragmenting foreign direct investment.

The IMF pointed to recent bills adopted against the backdrop of rising tensions between the U.S. and China, such as Washington’s Chips and Science Act. Japan recently imposed its own restrictions on 23 types of semiconductor manufacturing equipment, joining U.S. efforts to curb China’s ability to make advanced chips.

A recent survey conducted by the American Chamber of Commerce in China similarly showed a shift of foreign direct investment away from China. Less than half of its respondents ranked China as a top three investment priority for the first time in 25 years.

IMF economists said that money is now flowing into what are considered “geopolitically close countries.” The rise of “friend-shoring” could hurt less developed markets the most, the organization said.

“Emerging market and developing economies are particularly affected by reduced access to investment from advanced economies, due to reduced capital formation and productivity gains from the transfer of better technologies and know-how,” IMF economists including Jae-bin Ahn wrote in the report.

This comes as tensions increase between China and the United States. After a recent meeting between U.S. House Speaker Kevin McCarthy and Taiwanese President Tsai Ing-wen in California, Beijing made veiled threats,…