Gita Gopinath, first managing deputy director of the International Monetary Fund (IMF), warned that by returning to isolationist policies the globe’s biggest superpowers could offset all progress made since the collapse of the Soviet Union in the early 1990s.

“With the weakest global growth prospects in decades—and with disproportionate scarring from the pandemic and war slowing income convergence between rich and poor nations—we can little afford another Cold War,” Gopinath said, speaking in Colombia.

As Gopinath pointed out in her speech, the end of the Soviet Union and the thawing of Cold War tensions coincided with unprecedented economic integration and hyperglobalization defined by massive technological progress. 

She said newfound economic fragmentation could wipe out those gains and shave 7% off global GDP, equivalent to around $7 trillion.   

“If we descend into Cold War II, knowing the costs, we may not see mutually assured economic destruction. But we could see an annihilation of the gains from open trade. 

“Ultimately, policymakers must not lose sight of those gains. It is in their—and everyone’s—best interest to advocate strongly for a multilateral rules-based trading system and the institutions that support it.”

U.S. vs. China

The global economic and geopolitical landscape is arguably at its most unstable since the end of the Cold War. Russia’s invasion of Ukraine has made political divides more pronounced while ensuing sanctions on the country have caused significant economic pain in Europe and the West. 

Now, the war between Israel and Hamas threatens to hasten the creation of factions and bring the oil-rich Middle East into an increasingly tense global standoff.

But the U.S.’s shaky relationship with China seems most likely to set the stage for any future Cold War. The two countries’ economies account for around 43% of global GDP, but they have seen their economic relationship sour since former President Donald Trump ignited a trade war in 2018. 

More recently, increased saber rattling over the status of Taiwan, which China claims as its own, seemingly threatens to herald the official onset of a new Cold War.

Last month, China President Xi Jinping sought to reassure global leaders that the country was not looking to fight “a cold or hot war with anyone,” despite many viewing each country’s actions as contradictory to that claim.

The U.S. is trying to develop alternative trade ties with its allies, while China is attempting to decouple itself from the dollar as both countries brace themselves for alienation. 

More than a fifth of U.S. imports came from China in 2018. That figure has fallen to 13% in the space of five years, Gopinath pointed out in her speech for the IMF.

The recent behavior of the two economies caused “Dr. Doom” Nouriel Roubini to warn in April of the “balkanization of global supply chain,” as tensions lead to rising costs and the onset of global stagflation.

“Unfortunately, the Cold War between the U.S. and China is getting colder by the day,” Roubini said.

Gopinath highlighted that while the conditions for another Cold War—ideological and economic rivalries between the world’s two biggest economies—were similar to those in the 20th century, the consequences this time could be much more painful given the economic links between the U.S. and China.

The IMF member also pointed out it was less clear which countries would side with the U.S. and which would side with China compared with the first Cold War period, as former allies of the U.S. shift allegiances.