The International Monetary Fund said global tensions could reduce foreign investment and lead to global GDP growth being 2% lower in the long term.
"We may see fragmentation of foreign direct investment if companies start moving production home or to other "trusted" countries in order to increase the sustainability of their supply chains," the IMF said, referring to recent bills 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 limit China's ability to produce advanced chips.
IMF economists said the money is now flowing to countries that are considered "geopolitically close". The rise of “friend-shoring" could hurt less developed markets the most, the IMF said.
The IMF economists added that developing countries are more vulnerable to such a shift in foreign direct investment because “they rely more on flows from more distant countries in geopolitical terms.”
The IMF warns that even if more powerful countries receive the benefits they seek due to increased tensions, these benefits may be partially offset due to side effects from weaker external demand.