Free trade could be “annihilated” with world economy on the “brink of collapse” if the world sinks into a new Cold War it has been warned.

Gita Gopinath, deputy managing director of the International Monetary Fund (IMF) said “growing fault lines” such as Russia’s invasion of Ukraine and tensions between China and the US had caused shifts in the way the world did business.

Gopinath said “costs of fragmentation” were greater than ever after decades of globalisation had brought the world closer together when doing business.

She warned of costs amounting to trillions of dollars if the global economy split into two eastern and western blocs while speaking at an economic forum in Colombia.

The split could see a repeat of the decades-long struggle between the US and the Soviet Union during the first Cold War.

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Gopinath said: “Fault lines are emerging as geo-economic fragmentation is increasingly a reality. If fragmentation deepens, we could find ourselves in a new Cold War.

“The economic costs of Cold War Two could be large. The world has become much more integrated, and we face an unprecedented breadth of common challenges that a fragmented world cannot tackle.”

She went on to urge the world to protect basic tenets of free trade saying net zero and food security were under threat as a result.

But Gopinath said a retreat from globalisation remained unlikely, however losses could amount to between 2.5pc and 7pc of global gross domestic product (GDP).

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According to Gopinath trade links between the world’s biggest economies were already “being severed” with Mexico replacing China as the US’s biggest trading partner this year.

Gopinath added: “If we descend into Cold War Two, 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.”

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