When taken together, Xi Jinping’s ill-conceived economic nationalism and Western efforts to de-risk supply chains and otherwise rethink two decades spent perpetuating economic interdependence with China, look like a road to mutual assured destruction.

A hodgepodge of cautious commentary, analysis and color published and discussed over the past several days underscored the point.

In an interim outlook published Tuesday, the OECD devoted a special section to the possibility of another demand shock in China, and what it would mean for the global economy if accompanied by a stock swoon and tighter financial conditions around the world. The picture wasn’t especially encouraging.

The figure above shows estimates for the near-term impact of a one-year decline of 3% in Chinese domestic demand (versus the OECD baseline), assuming a 1% drop in household consumption, a 5% contraction in business investment and an 8% decrease in housing investment.

The OECD was quick to note that although “such a slowdown would be a relatively unusual event,” annual domestic demand growth in China decelerated by a comparable amount through 2014 and again in 2017, “with even larger declines during the pandemic.”

The tightening in financial conditions included in the scenario analysis assumed a 10% decline in equities and a 50bps increase in global risk premia. The upshot: Global GDP growth could be 1.1% lower in the first year of a hypothetical Chinese demand shock. If that first year were next year, it’d be insult to injury. The OECD already expects the slowest growth since the GFC.

World trade volumes, the OECD estimated, would be nearly 2.75% lower relative to the baseline in the same China demand shock scenario.

Of course, a slowdown globally would feed back into the Chinese economy through subdued external demand, exacerbating the situation. And, as noted here on Tuesday morning, some nations are actively cutting Chinese imports already in an effort to reduce “one-sided dependencies,” as the Bundesbank put it, in a clarion call for German industry.

In the same warning, the Bundesbank said it’s imperative that German politicians and corporates “rethink the structure of supply chains” and reconsider “further expansion of direct investment in China.” As discussed at some length in the Monthly Letter, foreign direct investment in China plunged in Q2 to the lowest since at least 1998, prior to China’s WTO entry.

The Bundesbank cited “increasing geopolitical tensions and the associated risks” for its recommendations. As it turns out, geopolitics was shaping foreign investment decisions long before Ukraine. Back in April, the IMF noted that geopolitical distance (as measured by foreign policy disagreement based on countries’ voting behavior in the UN General Assembly) is increasingly important when explaining FDI flows.

“Over the last decade, the share of flows among geopolitically aligned economies has kept rising, more than the share for countries that are closer geographically, suggesting that geopolitical preferences increasingly drive the geographic footprint of FDI,” the Fund said, adding that “if geopolitical tensions continue to intensify and countries further diverge along geopolitical fault lines, FDI may become even more concentrated within blocs of aligned countries.”

That might be “fine” (not really, hence the scare quotes) were it not for the world’s dependence on China — and China’s dependence on the world. The self-referential quandary posed by that interdependence is shaping up to be an economic question of paramount importance: Can China and the West decouple without destroying a world where geopolitical rivals are inextricably bound up with each other economically at every turn?

Spoiler alert: The answer is probably not. As Janet Yellen put it earlier this week, reiterating familiar talking points during an interview with (and please, spare me any sarcastic derision to which you might be inclined) Hillary Clinton, “it would be disastrous to try to decouple from China.”

The IMF was likewise blunt in their assessment nearly six months ago. “In general, a fragmented world is likely to be a poorer one,” the Fund said, exhorting policymakers (where that means politicians) to “carefully balance the strategic motivations behind re-shoring and friend-shoring against economic costs to their own economies and the spillovers to others.”