Economic fragmentation is rising as global tensions intensify, experts say

Geopolitical conflicts and tensions are fuelling a surge of economic fragmentation and protectionism around the world, public and private sector leaders warn.

The issue was a major topic of discussion at the World Economic Forum’s Annual Meeting of New Champions (AMNC), a gathering of top global voices from government, business, civil society and academia held in Dalian, China. The economic divisions, the participants said, pose a significant threat to global economic growth.

“The history of global economic development shows that openness brings progress while isolation leaves one behind,” Li Qiang, Premier of the People’s Republic of China, said in a speech at AMNC.

In recent decades, free trade has largely defined the global economy. Yet geopolitical rifts—particularly between the world’s two largest economies—and conflict are increasingly spurring governments to increase tariffs and revive the use of industrial policies to boost national economic development or competitiveness. As a result, economic ties are splintering and trade routes are being redrawn.

“Growing competition between global powers, in search of economic security and leadership, has contributed to a highly fragmented global economy,” Mirek Dušek, Managing Director at the World Economic Forum, wrote in TIME, adding that the “dark clouds of conflict, protectionism and a fragile multilateral system have so far ‘reallocated’ rather than diminished the flow of international trade and investment.”

At AMNC, participants warned that trade and technological decoupling is having an impact on businesses and consumers as prices rise and supply chains get disrupted.

“You see the global tension between the US and China, you see the polarized world,” said Mohamad Al-Ississ, Minister of Finance of Jordan. “The challenge is, frankly, that mistrust is there. Concerns are real — and they can very quickly escalate beyond the current protectionist concerns we have.”

Al-Ississ added that to ensure economic growth, his country needs to court investment, technology and science from all over the world.

Andre Hoffmann, Vice-Chairman of Swiss healthcare giant Roche, said multilateralism and globalization “was the source of richness that brought us prosperity” and warned that if “we lose this too quickly, it is going to have serious consequences.”

Fragmentation is especially worrying when it comes to critical economic and social issues, not least the clean energy transition.

“If there is one area where we need global cooperation and global collaboration, it is the energy sector,” said Vera Songwe, Chair of the Board of the Liquidity and Sustainability Facility, which works on sovereign debt in Africa. “My fear is that if we have these types of tariff policies, we won’t get a huge absorption of electric vehicles or EV buses or the battery storage systems that we need.”

Busi Mabuza, Chairperson of the Industrial Development Corporation of South Africa, added that international cooperation is vital for mineral-rich Africa to unlock the economic growth opportunities associated with the energy transition.

Geopolitical issues are also having a major impact on the financial sector and the international flow of capital. Following Russia’s invasion of Ukraine, for instance, certain stock exchanges delisted Russian firms and various financial services companies reclassified Russian indexes.

“The last two years have had fundamental changes in the global financial landscape,” said Fred Hu, Chairman and CEO of Primavera Capital Group. “I think the Russia-Ukraine war was the catalyst.”

“Mounting geopolitical uncertainty, whether it’s real or perceived,” he said, would cause people to refrain from investing their money. As a result, the “world economy and the global financial system as a whole will pay a very dear price.”

Nonetheless, efforts are underway in various regions around the world to strengthen economic ties and increase free trade.

For instance, the African Continental Free Trade Area agreement aims to create the world’s largest free trade zone. The deal, which is currently being ratified by 44 countries, would bring together a total of 1.3 billion people into an economic bloc with a combined GDP of roughly $3.4 trillion.

“Business needs to adopt the principles of the African Continental Free Trade Area, and governments must come to the party in terms of ensuring that the tariff barriers and the non-tariff barriers that impede our trade are put down,” Mabuza said.

The Forum’s Dušek said the global economic fragmentation coincided with some new economic opportunities, notably the emergence of “intelligent economies” that are anchored in a wide variety of technological advancements.

“Economic splintering is coinciding with a unique opportunity to start building much more productive, inclusive and sustainable economies around the world,” Dušek said.