April 10, 2023: On Wednesday, the International Monetary Fund reported that global tensions could disrupt overseas investment and lead to a long-term loss of 2% of the gross domestic product.

Companies and policymakers all over the globe are exploring ways to make their supply chains resilient by “moving production home or to trusted places,” the IMF is warning in its report, which adds that this will lead to fragmenting foreign direct investment.

The IMF pointed to the latest bills adopted against rising tensions between the U.S. and China, like Washington’s Chips and Science Act. Japan recently prohibited 23 types of semiconductor manufacturing equipment, which joins U.S. efforts to curb China’s ability to make advanced chips.

The latest survey by the American Chamber of Commerce in China showed a shift of foreign direct investment away from China. Less than half of its respondents rank China as a top three investment question for the initial time in 25 years.

IMF economists stated that money is flowing into what is considered “geopolitically close countries.” The organisation said that the increase in “friend-shoring” could hurt less developed markets the most.

“Emerging market and which increases economies are particularly affected by decreased access to investment from advanced economies, due to came down the capital formation and productivity gains from the transfer of technologies and know-how,” IMF economists, which include Jae-bin Ahn, wrote in the report.

This comes as tensions surge between China and the United States. After a recent discussion between U.S. House Speaker Kevin McCarthy and Taiwanese President Tsai Ing-wen in California, Beijing is making veiled talks, pledging to take “resolute actions” to answer the “provocation.”

The IMF economists further that developing economies are more vulnerable to this transfer in foreign direct investment as “they are relying more on flows from over geopolitically distant countries.”

IMF warns that even if more powerful places reap the benefits they seek through increased tensions, that profit could be partially offset because of spillover from weaker external demand.

“A fragmented is likely to be poorer,” the IMF economists wrote.