China and the US risk entering a 'new cold war' as trade and investment ties strain, IMF official says

• The US and China risk a "new cold war" if the two countries drift further apart, an IMF official said.
• Shifting investment trends and strained trade could further divide the US and China, the official said.

China and the US risk entering a "new cold war" amid strained economic and trade ties, according to Gita Gopinath, the deputy managing director at the International Monetary Fund.

In a speech delivered Monday in Colombia, Gopinath highlighted that China's no longer the biggest trader partner for the US, and that the country has also lost ground as a destination for overseas investors.

Economic fragmentation, she said, is increasing, and that poses risks to both nations as far erasing the progress made previously. However, at the same time, each nation has a larger degree of economic interdependence than in the past.

"If fragmentation deepens, we could find ourselves in a new cold war," she said. Falling into such conditions could spark "an annihilation of the gains from open trade."

"It is in [policymaker's]—and everyone's—best interest to advocate strongly for a multilateral rules-based trading system and the institutions that support it," she said.

To be sure, heightened interdependence, Gopinath said, does ultimately raise the risk of fragmentation.

Emerging markets including Mexico and India, as well as the United Arab Emirates, have cut into China's trade role with the US. Not only that, but Gopinath said certain "suggestive evidence" illustrates how the direct ties between China and the US of the past are being replaced with indirect links.

"For example, large electronics manufacturers have accelerated relocating production from China to Vietnam, given US tariffs on Chinese goods," she said. "However, Vietnam sources most inputs from China, while most exports go to the US. Meanwhile, Mexico eclipsed China as the biggest exporter of goods to the US in 2023. But many manufacturers opening plants in Mexico are Chinese companies, targeting the US market."

Throughout 2023, economic growth trends for China and the US have increasingly diverged. China has had to navigate a severely troubled real estate sector and a softer-than-expected rebound from the pandemic. The US, on the other hand, has increasingly appeared on track for a soft landing of its economy.